LONDON Greece's exit from the euro zone would inflict untold damage on Europe's economy, further burnish the attractiveness of a rising Asia and hasten the emergence of China's yuan as a global currency.
Until recently, even thinking about the consequences of a break-up of the euro was, well, unthinkable. No longer.
Doubts over how much more austerity recession-hit Greece can endure are growing by the day. They are matched by doubts as to how long political and public opinion in Germany, the euro zone's paymaster, will stand for keeping Athens and others on the bloc's periphery afloat with emergency loans and bond purchases by the European Central Bank.
Some within the ECB are equally unhappy about it.
If the outcome of the mounting crisis is unpredictable, so are the consequences.
Domenico Lombardi with the Brookings Institution, a Washington think tank, said the economies of the euro zone are so inter-connected that the secession of one of the 17 members would open up a Pandora's box.
Greece could not quit or be expelled from the bloc in a surgical manner. Markets would then line up Italy in their sights. If Rome were then forced out, France's banks -- already under pressure from short-term funding strains -- could melt down because of their exposure to Italian debt.
"It would be almost impossible to draw the line. You could devise a framework for an orderly exit in normal circumstances, but we have gone much too far for that," said Lombardi, a former executive director of the International Monetary Fund. He put the chances of a euro zone break-up at fifty-fifty.
Echoing that view, U.S. President Barack Obama said an even bigger problem than Greece is what may happen if Spain and Italy come under renewed attack.
In a sign of the dangers that the crisis poses for the already weak U.S. economy, Treasury Secretary Timothy Geithner heads to Europe on Friday for the second time in a week for an unprecedented meeting with euro zone finance ministers.
ALL EYES ON ITALY
One starting point in trying to assess the economic fall-out is the September 2008 bankruptcy of investment bank Lehman Brothers, which dragged the global financial system to the precipice and tipped much of the world into recession.
The shock was all the more severe because many investors were betting the U.S. government would bail out Lehman, just as it had arranged a firesale of rival Bear Stearns earlier in the year.
By contrast, the market for credit default swaps is pricing in a 90 percent-plus probability that Greece will default on its debt, fanning open talk -- hotly denied by Athens -- that the next step would be to quit the euro zone altogether.
Even though Greece's travails are well known, a genuine hint that it might throw in the towel would trigger market mayhem, with Italy particularly exposed, said Nicholas Spiro, managing director of Spiro Sovereign Strategy, a London consultancy.
"The fear and panic that this would cause is incalculable," Spiro said. "The issue is whatever happens in Greece is perceived as a template for what could happen elsewhere. It would be disastrous for Italy."
A Greek exit is often viewed as positive for the euro's exchange rate, said William Buiter, Citi's chief economist.
"We fear, however, that it would be a financial and economic disaster not only for Greece, but also for 16 continuing euro area member states, and that it would also have severe economic and political implications for the whole of the EU and the wider global economy," Buiter said in a report issued on Tuesday.
CHINA WATCHES AND WAITS
The rush to safe-haven assets and to square positions after a break-up of European Monetary Union would be akin to the aftermath of Lehman's default, according to Seamus Mac Gorain with J.P. Morgan Securities in London.
In a note to clients, he argued that the dollar would be the currency to benefit most from what would be a "seismic" event.
"For one, heightened volatility would prompt investors to buy back funding currencies. Second, euro break-up would undermine its challenge to the dollar as a reserve currency," Mac Gorain wrote.
The dollar is also the obvious candidate if importers and exporters, anticipating the collapse of the euro, were to seek to trade in an alternative currency, he added.
Fragmentation of the euro would also open the door for China to accelerate the international use of the yuan.
Beijing started promoting the yuan as an invoicing and settlement currency after Lehman's bankruptcy led to a drying-up of dollars to finance trade. China's exports slumped, costing millions of jobs.
About 7 percent of Chinese trade is now conducted in yuan, also known as the renminbi, and that share would be sure to jump if the euro broke up.
"Strategically, it would help drive the globalisation of the yuan," said Ding Yifan, a deputy director of the Development Research Centre, a think tank in Beijing under the State Council, China's cabinet.
Indeed, Ding said the risk was that the pace of internationalisation would be too fast for comfort. "This is an opportunity for China, but also a challenge, because China does not want to move too fast," he said.
ASIA CLEANS UP
Rob Subbaraman, Nomura's chief Asia economist based in Hong Kong, agreed that China was likely to speed up use of the yuan beyond its borders, activate yuan swap lines and take other measures to help Asia's economies if the euro broke up.
And because the euro zone's problems are likely to reduce Europe's long-term growth potential, Asian companies will have an extra incentive to invest more in their own region and in other emerging markets, he said.
But in the short term, Asia could not escape unscathed from a collapse of the euro. Nearly all countries in the region export more to Europe than they do to the United States, and the exposure of European banks to Asia ex-Japan, at $1.4 trillion, is three times greater than that of U.S. banks.
"If there's a meltdown, the home bias of U.S. and European investors will kick in, particularly European banks. The risk of them cutting their credit lines in Asia could be quite big," Subbaraman said.
That is what happened after Lehman went bust. Nearly $80 billion left Asia in the fourth quarter of 2008 and the first three quarters of 2009. But in the following 18 months, nearly $500 billion of capital flowed back, Nomura calculates.
If the euro's malaise causes history to be repeated, the reflows of money to Asia are likely to be on an even larger scale as investors weigh up which region has the brightest prospects, Subbaraman said.
"The relative strengths of Asia and the West are just becoming more and more stark in terms of fundamentals and the room for policy manoeuvre," he said.
And that could be one of the lasting lessons of the battle for the euro.
(Additional reporting by Langi Chiang in Beijing, editing by Mike Peacock)