Greece's Debt May Have Massive Ripple Effect

Greece's "collision course" with its creditors is likely to have a deep impact well beyond Greek borders and Europe. Melissa Block talks through some of those scenarios with Ken Rogoff — economics professor at Harvard and former chief economist with the International Monetary Fund.

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MELISSA BLOCK, HOST:

Greece's collision course with its creditors that Sylvia just mentioned is likely to have a deep impact well beyond Greek borders, and beyond Europe.

To talk through some scenarios, I'm joined by Ken Rogoff, economics professor at Harvard and former chief economist with the International Monetary Fund.

Ken Rogoff, welcome back to the program.

KEN ROGOFF: Thank you so much.

BLOCK: Why don't we start right off the bat with a doomsday scenario, the most dire outcome that you see could possibly come to pass in Greece. Is it that Greece would leave the eurozone?

ROGOFF: It isn't so much Greece leaving the eurozone, which might actually be good for Greece. It's that the rest of the eurozone doesn't quite know where to draw the line. Immediately, investors would test: will Europe defend Portugal? Will it defend Spain? One thing that's very scary is if Greece, just on its own, decides to give up. They leave the euro without striking any kind of soft decks at any kind of deal, leading to chaos in Europe. That's still an outside risk.

But in politics and economics it can be a very volatile mix. These things happen, countries do very self-destructive things and it can spread very fast and wide.

BLOCK: And what would the ripple effects of bad be, that scenario that you're laying out?

ROGOFF: Well, quickly, investors would go after other smaller, weaker countries that are unable to borrow on their own. Germany would be safe, possibly France would be safe. But many of the other countries - Spain, Portugal, Ireland, Greece, of course, would be gone - all of these countries would be in big trouble, and would really need Germany to come in, the European Central Bank, everyone to say - that's it, their debt is our debt and we will pay it.

BLOCK: What do you think is likely to happen with the bailouts deal for Greece? We now have politicians at the table, the powerful seat at the table, who call the bailouts terms barbaric. The anti-austerity voices there are much stronger now. Is that deal about to fall apart?

ROGOFF: I think it's a question of timing. The deal will fall apart. It calls on Greece to have its debt rise and to make payments over the long-term, which nobody believes will happen. Everybody thinks it will come back to the table. I think what the other Europeans are worried about is having it come back so quickly. They'd like to have some time pass to hopefully let the other countries heal. Who knows, maybe have some growth in Europe so that they can start to dig their way out.

The problem is that Europe is not growing. Their income is not going up to pay off these debts. And if that doesn't happen, it's very, very hard to do it just with budget cuts. That's going to lead to recession for years and years. No country, no voters, no one is going to tolerate that.

BLOCK: Let me have you walk this story, or sail this story, across the Atlantic to the United States, Ken. What are the implications for the United States with all this uncertainty now in Europe about the loan agreement with Greece and what's going on with austerity, what does it mean for us here?

ROGOFF: Well, there's no doubt that there's a huge uncertainty casting a shadow over the U.S. economy, making businesses reluctant to invest. I don't know what can clear up that uncertainty. We can try to have more strengths of our own. But we live in a world where Europe is in birth, in a way, and it could be great for us in the long run to have a stronger partner across the Atlantic. But it's certainly traumatic watching this nation grow.

BLOCK: Ken Rogoff, thanks for talking with us.

ROGOFF: My pleasure, thank you for having me.

BLOCK: Ken Rogoff is economics professor at Harvard University and former chief economist with the IMF.

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