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When Greece, if it follows the course predicted by analysts, defaults in the coming months it will cause a lot of damage. What that damage will be is anyone’s guess.

Back in September, UBS issued a report on a owrst case scenario for a Greek exit (Grexit) of the Eurozone. The short conclusion that can be inferred from the report is “the only way to hedge against a Euro break-up scenario is to own no Euro assets at all.”

The report also included a delightful prediction made in 1997 by economist Martin Feldstein:

Uniform monetary policy and inflexible exchange rates will create conflicts whenever cyclical conditions differ among the member countries … Although a sovereign could in principle withdraw from the [European Monetary Union], the potential trade sanctions and other pressures on such a country are likely to make membership in the EMU irreversible unless there is widespread economic dislocation in Europe or, more generally, a collapse of the peaceful coexistence within Europe.

The outcome for Europe, thus, is not just a break-up of the Eurozone, but the institutions which have maintained peace on the continent for the past 60 years will collapse along with it. Angela Merkel has hinted that a break-up of the Eurozone would lead to retribution from Germany – read into that: conflict.

The problem is that a Grexit and a Greek default would not merely be contained to Greece or the Eurozone. Whilst British banks have shored themselves up against a Greek default, the same cannot be said of French and German banks, for which there is considerable exposure to in our system. The situation in Greece threatens to bring everything down with it. The unknown consequences and the relative unpredictability of the situation is very frightening indeed.

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