David Mackie, the chief European economist at JP Morgan Chase in London, stressed that such a large bailout would be a “worst-case contagion scenario”.
But he called for European officials to starting thinking about “policy options of the last resort” in order to have a fallback plan in place should the situation in the euro area deteriorate any further.
Mackie said the best way to limit the contagion to Spain, Portugal and Ireland would be for Europe to guarantee the countries’ government debt for a limited period of three years or so.
He added that even if all four countries were to need support packages equivalent to the one currently being discussed for Greece, the cost to the Eurozone would be around eight per cent of GDP in the rest of the region.
“This is a big number, but…the region has the fiscal capacity to backstop both banks and these countries,” he said.
Greece has been the subject of mounting concern over the country’s ability to meet repayments on €8.5bn of its debt by 19 May. The Eurozone is now expected to shore up its original proposed €45bn bailout for Greece, with a three-year package of up to €120bn thought to be in the offing.
Analysts have warned of a financial crisis on the scale of the meltdown precipitated by the collapse of Lehman Brothers in 2008, should Greece’s woes spread to other countries in the Eurozone area.