[jyl]

Greek govt bond default will go along w/ Greek banking system failure.

Other Southern European banking systems will be attacked, ditto their govt bond yields. A confidence, contagion, speculator attack, for the most part. Amount of Greek govt debt held by other countries' banks is not that large. Those banks have been cutting their exposure to Greek banks for months.

ECB and EU countries will pull out the stops to defend Spain, Italy, etc. ECB has enormous lending powers due to having power of the (currency) press. Yields may soar, for awhile. Inter-bank transactions and other lending may freeze up, briefly. EU consumers may stop spending and business stop investing, for a short time. But since the ECB can back [pick your country] and it's banks with a trillion EUR, probably the defense holds.

Meanwhile, life is hell in Greece. No functioning banking system. No international credit. No drachma (can't print money that fast). Govt runs out of money. Stops paying workers. Population takes to the streets. Revenue plunges. How do you export olives when ports are shut, how do you import parts for machines when you've no bank to pay through, how do you earn tourist EUR or USD when riots are keeping tourists away? Probably Greece keeps using the EUR for some time, so don't even get a competitive help from currency devaluation.

Neighbors will close borders with Greece, Schengen be damned. Media will be all over the hell in Greece. Scare the Spanish, or anyone who thinks leaving the euro is a good idea, back into line.

At the same time, Germany will bend on stimulus. Seeing an EU country disintegrate will be as appalling to the Germans as to anyone. They're already being pressured by much of Europe, the US, the IMF, etc to take a more balanced approach.

So, it's a long hot summer. The US is hurt too, but is a relative safe haven while Europe plunges into crisis and China struggles with (what for them is a) recession.

Question - if you're the Chinese govt and your main method to stimulate the economy is to order the state banks to make loans, and just 3 years ago you had them pump $1TR of loans into every condo development, office park, highway project, new airport, etc that anyone could think of - and a lot of those loans are threatening to turn bad now - how do you accomplish stimulus part 2?