By Nerijus Maciulis, Chief economist, Swedbank

The scenario described by Andrew Lilico is highly unlikely. Greece, Ireland and Portugal together constitute less than 6% of Euro area GDP – even if all of them restructure their debt at the same time, the effect will most probably be contained.

One of the reasons why ECB and European Commission keep resisting any kind of restructuring is to make sure that there will be no disastrous spill-over effects to financial sector. It is likely that ECB and EC are waiting for the results from bank stress tests before they take any decision on restructuring. But behind the closed doors there probably is a discussion on how to proceed with orderly and contained restructuring.

In case of the first (chaotic and contagious) scenario, the effects would be dramatic, despite Lithuania's weak links with euro area periphery. Increasing uncertainty and flight for safety would cause higher interbank interest rates and government borrowing costs. This would undoubtedly damage credit markets, which have not yet recovered from a previous blow. Lower confidence and higher interest rates would deter investments; consumers would increase savings and reduce spending. After global financial crisis the economy has adapted to different conditions and now households and companies are much less dependent on borrowed capital. However, current economic growth in Lithuania was mainly based on strong exports – a strong dent in foreign demand would slow down our recovery, if not cause another recession.

A more likely scenario is orderly restructuring (probably well before 2013, when European Stability Mechanism is introduced), which will cause some short-term volatility, but not significant damage to the real economy.