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Greece default unlikely to cause economic contagion, experts say

By Kulwant Saluja, Medill News Service
Greece's Prime Minister Alexis Tsipras, center, speaks to the media after voting at a polling station in Athens, Sunday, July 5, 2015. Prime Minister Alexis Tsipras has urged people to vote "No" in a crucial referendum that will decide whether or not Greeks choose to accept international creditors' proposals for more austerity in exchange for rescue loans needed to avoid default and a banking collapse . Photo by Yuksel Pecenek/UPI
Greece's Prime Minister Alexis Tsipras, center, speaks to the media after voting at a polling station in Athens, Sunday, July 5, 2015. Prime Minister Alexis Tsipras has urged people to vote "No" in a crucial referendum that will decide whether or not Greeks choose to accept international creditors' proposals for more austerity in exchange for rescue loans needed to avoid default and a banking collapse . Photo by Yuksel Pecenek/UPI | License Photo

WASHINGTON, D.C., July 7 -- Greece's rejection of bailout terms imposed by European creditors has deeply concerned western economists, but the referendum had only a mild impact on the U.S. stock market.

Greek Prime Minister Alexis Tsipras said that his country made a "brave choice" rejecting terms of its European creditors.

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U.S. stocks dropped 100 points Monday, but recovered from a morning selloff on the Greek news.

Could contagion caused by the Greek exit from the euro trigger a worldwide financial meltdown?

Harvard University Professor Kenneth Rogoff, speaking on a Council of Foreign Relations conference call, said a global recession was highly unlikely.

"I veer towards confidence," said Rogoff, an expert on financial crises. "First off, Greece is a much smaller economy than Louisiana. Private debt has exited. Nearly all of Greece's debt is payable to either its domestic banks or foreign creditors that are international institutions. You are not going to have Lehman. It's the polar opposite to Lehman."

"So far, there hasn't been a contagion," Rogoff said. "The Greeks have lost a lot of leverage today."

Last week, the European Central Bank, which has supported Greek financial institutions with emergency financing, sought to impose additional controls, halting payments to the banks. Greek banks have been shut down since last week and daily caps were placed on ATM withdrawals of 60 euros, or about $67.

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Unlike 2010, when bigger economies like Spain and Italy were in trouble, the U.S. government has largely taken a passive approach.

"The U.S. has been doing OK -- some would say well," Rogoff said. "The last thing they would want to do is throw a wrench into the problem."

The resignation of Greek Minister of Finance Yanis Varoufakis prompted some observers to conclude Greece was in a more conciliatory tone Monday. In a blog post Monday, Varoufakis acknowledged there was a "certain preference by some Eurogroup participants, and assorted 'partners' for my 'absence from its meetings.'" His intractability had been viewed by some as an obstacle in negotiations with the European creditors.

"Changing ministers was a good step," said Sebastian Mallaby of the Council on Foreign Relationships. "It's a signal of good will, but doesn't materially change anything."

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