How big is the risk of contagion from Greece to the rest of the Eurozone?

While the latest turmoil in the Greek political scene is under way, Eurozone leaders for the first time openly admit the unthinkable: Greece might have to leave the Euro for the single currency to survive. So far, the risk of spillover effects from Greece to the remaining of Europe’s peripheral countries has been contained through (i) two successive bail-out Greek packages (for €110bn in May 2010 and then again for €109bn in July 2011) and (ii) and the “brave” decision by the European Central Bank to purchase European peripheral government bonds in an attempt to buy time and inject liquidity in financial markets. Nevertheless, as the cost of servicing Italian, Portuguese and Spanish government bonds is on the rise, it becomes increasingly evident that a solid “firewall” around Greece needs to be built. In practical terms, this, according to Eurozone leaders, might involve Greece’s exit from the Euro.