Can Europe survive a Greek debt default?

As last-minute negotiations over Europe's new $171 billion bailout of Greece rage behind closed doors, concerns are already mounting that the rescue package won't be nearly enough to fix the debt-plagued nation's awful financial mess. Some European Union leaders appear resigned to the fact that Greece will eventually default on its debt — a development that would have been unacceptable a year or two ago. Here, a guide to Greece's gloomy prospects:

This bailout is massive — is $171 billion really not enough?

Not if you're as deep in the red as Greece is. Even if Athens secures the bailout package, Greece's debt-to-GDP ratio will still be as high as 135 percent in 2020. That means Athens' borrowing costs will remain sky-high for years to come. The country is also in its fifth straight year of recession, strangling any hopes of raising new revenue from economic growth. And the government's severe austerity measures, a precondition for securing the European bailout, almost guarantee that the economy will remain in the dumps.

Subscribe to The Week

Escape your echo chamber. Get the facts behind the news, plus analysis from multiple perspectives.

SUBSCRIBE & SAVE

Sign up for The Week's Free Newsletters

From our morning news briefing to a weekly Good News Newsletter, get the best of The Week delivered directly to your inbox.

From our morning news briefing to a weekly Good News Newsletter, get the best of The Week delivered directly to your inbox.

Sign up

Are EU leaders discussing a potential default?

Not openly. Germany and other European powers insist that they are totally committed to preventing a default and keeping Greece in the eurozone. But the possibility of default burst into the open when Greek Finance Minister Evangelos Venizelos bitterly complained, "There are many in the eurozone who don't want us anymore." German Finance Minister Wolfgang Shaeuble said Germany really does want to help Greece, but would not "pour money into a bottomless pit." He also asserted that Europe was "better prepared than two years ago" to deal with a default.

What is the worst-case scenario?

It's not pretty. A Greek default could spark a chain reaction throughout Europe, in which suddenly skittish investors drive up borrowing costs for other indebted nations, including Portugal, Ireland, and Italy. If those economies fail, it could spell the end of the euro, as well as Europe's dream of true economic integration. Some analysts predict that a Greek default would hurt just as badly as the devastating collapse of Lehman Brothers in 2008, which sent shockwaves across financial markets and pushed the global economy into a recession.

And the best?

"It all comes down to whether the default is controlled or chaotic," writes Douwe Miedema at Reuters. The European Central Bank is flooding the market with cheap money, reducing the chances of a credit crunch for European banks exposed to Greek debt. There is also growing confidence that European countries have effectively created a "firewall" around Greece, the U.K.'s Guardian reports. If Europe can avoid a credit freeze and prevent contagion, it could contain the fallout from a Greek default, and even keep Greece in the eurozone.

Sources: Agence France-Presse, Associated Press, The Atlantic, Bloomberg (2), Forbes, The Guardian, The New York Times, Reuters