When Greece fails, the euro will get shaken to its core. It may survive, but it won't look anything like it does today.

When someone says they're doing something "just in case," you know they don't hold much hope for a good outcome.
Case in point: Greece.
From EU trade commissioner Karel De Gucht in Reuters...

A year and a half ago there maybe was a risk of a domino effect. But today there are in the European Central Bank, as well as in the Commission, services working on emergency scenarios if Greece shouldn't make it. A Greek exit does not mean the end of the euro, as some claim.

This leaves an opening for stable EU countries (read, Germany) to back out of bailout efforts. The whole game has been to save the euro, not Greece, anyway.
And for the first time, this thinking is out in the public from someone on the inside. It looks as though the eurozone has a contingency plan.

The European Central Bank has even stopped providing liquidity to some Greek banks because their reserves were too low. Ironically, their reserves are too low because Greeks withdrew some 800 million euros from their accounts earlier last week.
As De Gucht said, "The endgame has begun, and how it will finish I do not know."
If the EU stops providing liquidity, Greece will repudiate its debts.

Alexis Tsipras, the head of Greece's radical left party, said, "Our first choice is to convince our European partners that, in their own interest, financing must not be stopped... but if they proceed with unilateral action on their side, in other words they cut off our funding, then we will be forced to stop paying our creditors, to go to a suspension in payments to our creditors."
That's just a macho way of saying, "We won't be able to pay."
And he's right.

But what that means for Greece and the euro remains to be seen. We don't know yet if Greece will work to keep EU bailout money flowing or not. De Gucht says Greece's future is with the eurozone, but he left the door wide open for Greece's exit.
On Friday, Greece moved to dissolve its parliament... a move that would clear the way for new elections on June 17.
On the ballot are severe anti-austerity and anti-bailout groups, and that could make for a very quick and disorderly exit from the eurozone.

Indeed, in response, Fitch downgraded Greece's debt from B- to CCC, saying that failure to form a government that would implement the bailout terms would mean a "probable" exit from the currency union.
So what happens if Greece drops the euro (or is forced from it)?
We're talking about a total financial collapse -- bank runs, defaults, massive financial losses, soaring inflation -- all in the face of a structurally flawed system that has not been reformed and was the cause of Greece's problems in the first place.

It could put Greece into a depression, as Citi's Willem Buiter suggests.
For the euro itself, a Greek exit would mean chaos and uncertainty... at first.
Not only would hundreds of billions of dollars in bailout money be lost, it would mean that the euro currency is not as binding or inalterable as once thought.

Other failing economies could exit, throwing further uncertainty into the mix.
But from one perspective, the euro might gain some strength on the other side of things. If the eurozone can maintain most of its members with strong (or at least stable) economies, then shaking out the dead wood might have a positive effect on the euro.
Of course, this would be much farther down the road, after Portugal and Spain (and perhaps Italy) are dealt with.
But the euro itself might not die.
The New York Times' Binyamin Applebaum writes:

The foot-dragging and brinkmanship of the last few years have won the other members of the currency union valuable time to prepare for life without Greece. Banks have recorded losses on Greek investments, companies are making contingency plans and Europe has bolstered rescue funds for other vulnerable nations like Portugal, Ireland and Spain.

I think that's what De Gucht meant by there no longer being a domino effect.

In the meantime, though, Greece and the rest of the eurozone are in for a chaotic ride... at least until the next election.
But the wheels are in motion, and the effects on other eurozone countries are being calculated.
Germany thinks it would lose 100 billion euros. France, 50 billion. For both countries, that's about 3% of their annual economic output.

But Applebaum is right. This drawn-out debt debacle has given investors a chance to reduce their exposure... not only to Greece, but to the whole of Europe as well. And that could leave enough space between the dominoes to stop a worldwide recession.
I think we're getting closer and closer to waving good-bye to Greece.

Asad Khan
Financial Analyst  (CFB)
050-8774861
asad@cfb.ae