Two years ago, European leaders were willing to do almost anything to prevent a financial meltdown in Greece. If Greece defaulted on its debt or left the euro zone, it could have triggered a chain reaction across Europe, and global financial panic.
The country may be in even worse shape today, with some analysts saying that a chaotic exit from the euro zone is inevitable—perhaps as early as this summer. But many changes over the last two years have made the rest of the world less vulnerable to an implosion in Greece. "My gut feeling is that if Greece exits, it will be less calamitous than it would have been two years ago," says Jan Randolph, director of sovereign risk for forecasting firm IHS Global Insight. "Leaders in Europe have managed to put Greece in a cushioned room, so they'll be able to contain the situation much better than before."
If Greek voters and politicians choose to reject the conditions that have come with a serious of bailouts and global lenders suspend their payments, Athens could run out of money as early as June, according to a recent analysis by Bank of America Merrill Lynch.
The fallout from that could send the Greek economy into an even sharper tailspin, with growth shrinking by another 10 percent per year.
Had this unfolded two years ago, it could have trigger an industrial-strength bank run that spread to U.S. shores. But a series of interim rescue payments has bought Europe valuable time, allowing banks to write down much of their Greek debt or transfer it to public-sector entities. A Greek default would still mean losses, but much of that would be borne by taxpayers in Germany, France and other countries, reducing the odds of a collapse of Europe's financial system.
The emphasis now isn't on preventing a meltdown in Greece (Sorry, Greece), but is instead to "ring-fence" Greece so that its problems don't spread to other stressed nations like Spain, Portugal and Italy. Some fear bank customers in those countries might start withdrawing their money out of fear that it could be devalued if the euro zone further breaks apart. That's already happening in Greece, where depositors would rather withdraw euros and stuff them in mattresses than risk having their savings converted to Greek drachmas.
But there would be options for preventing that kind of panic in other European nations that don't exist in Greece. European governments and the European Central Bank could backstop the private banks and issue open-ended deposit guarantees, for example. That's basically what happened in the United States during the 2008 financial meltdown, and it stabilized the banking sector.
Greece doesn't have the resources to do that on its own, and other European nations won't help if Greece doesn't abide by the required austerity measures. But Spain, Italy and Portugal have instituted reforms that Greece hasn't. "The difference in those countries is there's political will," says Randolph. "They're taking reform and making progress."
Big investing firms are now drawing up detailed contingency plans to predict how a full-blown Greek default might evolve. Stock markets would almost certainly drop, but investors might then pause to see if Europe's policymakers are up to the challenge. Another unknown is whether derivatives tied to Greek or other sovereign debt would blow up unexpectedly, as they did at AIG in 2008. If Greece defaults and no other dominoes seem poised to fall, the markets might recovery quickly.
As the drama unfolds, the euro seems likely to weaken against the dollar, which could push U.S. interest rates even lower than they are now (while making travel to Europe cheaper for Americans). If Greece defaults, the Federal Reserve might pull the trigger on more quantitative easing as a cushion to prop up the economy.
Merrill Lynch sees some possible investing opportunities amid the chaos. A weaker euro might boost sales for healthy European companies that export, for example, and the beaten-down shares of European banks might rally if Greece defaults but Armageddon doesn't happen. Silver linings are usually a good sign that the storm won't last forever.
Rick Newman is the author of Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman