Eurozone crisis: As Greece struggles, the world imagines a default

Slower economic growth throughout Europe, and probably in the United States. Huge losses by major European banks. Declining stock markets worldwide. A tightening of credit, making it harder for many borrowers to get loans.

As concerns grow that Greece may default on its government debt, economists are starting to map out possible outcomes. While no one knows for certain what will happen, it's a given that financial crises always have unexpected consequences, and many predict there will be collateral damage.

Because of these fears, Greece is working frantically in concert with other European nations to avoid default, by embracing further austerity measures it has promised in return for more European bailout money to help pay its debts.

But some economists believe default may be inevitable - and that it may actually be better for Greece and, despite a short-term shock to the system, perhaps eventually for Europe as well. They are beginning to wonder whether the consequences of a default or a more radical debt restructuring, dire as they may be, would be no worse for Greece than the miserable path it is currently on.

A default would relieve Greece of paying off a mountain of debt that it cannot afford, no matter how much it continues to cut government spending, which already has caused its economy to shrink.

At the same time, however, there is a fear of the unknown beyond Greece's borders. Merrill Lynch estimates that the shock to growth in Europe, while not as severe as in the aftermath of the financial crisis of 2008, would be troubling, with overall output contracting by 1.3 percent in 2012.

While other countries have defaulted on their sovereign debt in recent times without causing systemic contagion, analysts weighing the numbers on Greece note that its debt is far higher, so the ripple effects could be more serious.

Total Greek public debt is about 370 billion euros, or $500 billion. By comparison, Argentina's debt was $82 billion when it defaulted in 2001; when Russia defaulted, in 1998, its debt was $79 billion.

Economists also warn that a Greek default could put further pressure on Italy, the eurozone's third-largest economy, which, though solvent, is struggling to enact austerity measures and find a way to stimulate growth. Moreover, Italy's government debt is five times the size Greece's, and concerns about Italy's ability to meet its obligations could grow if Greece defaults.

In a new sign of trouble for the country, Standard & Poor's on Monday cut Italy's credit rating by one notch to A, citing its weakening economy and limited political response.

"Orderly or not, we have no idea what the effect of a default would be on other countries, especially Italy," said Peter Bofinger, an economist who advises the German Finance Ministry. "If there is just a 5 percent chance that this affects Italy, then you don't want to do it."

In part, what would happen in the wake of a Greek default would depend on whether European leaders could create a firewall to control the damage from spreading widely. That would require officials - who so far have not been able to agree on the right fix for the Continent's financial problems - to come together in ways they so far have not been able to, because it is politically unpopular in some countries to spend many billions more bailing out Greece.