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So what happens if Greece defaults because the political and civil backlash of its austerity commitments overwhelm the country?
A contagion could well be triggered starting with other heavily indebted euro zone economies, including Italy, which has the third-largest bond market in the world.

These economies will see a sharp rise in their cost of borrowings, above the critical 7% yield mark, where they too would need a bailout. This would trigger a credit crunch in the monetary union geography, tipping it into a sharp and lengthy period of output contraction.

The US and the UK would also be pushed into a recession and global trade flows would shrink significantly.

Riskier asset markets from stocks to commodities would lose value sharply. The euro area plays a critical role in the global economy and therefore has potentially large spillover effects on the rest of the world.

The region produces about a fifth of global output, second only to the US. With its exports and imports together adding to almost 30% of GDP, the area accounts for a larger share of world trade than any other economy.

Its financial sector is also one of the world’s largest, with banking exposures to other countries exceeding those of all other economies.

Clearly, India couldn’t be untouched.

The impact would be felt from trade, remittances, finance/ capital and confidence channels.

The most likely immediate impact would be a sharp depreciation of the rupee and a steep fall in the equities on severe risk aversion and de-leveraging by banks. Other asset classes would also come under a lot of strain too.

Dollar shortage in the inter-bank market can become severe as there would be a flight of capital and inter-banking funding markets would freeze for some time, like during the Lehman crisis.

Rupee liquidity would also be squeezed as the Reserve Bank of India (RBI) would have to intervene aggressively and sell dollars to stem the pressure on the rupee, prompting the central bank to ease monetary levers.

Rollover of short-term trade credit, which stood at $19.7 billion at the end of September 2011, would also become difficult, as euro area banks cut down on credit lines. This would add to the pressure on the rupee.

Moreover, refinancing of external commercial borrowings or debt repayments would become difficult, stressing the corporate sector.

As per RBI data, ECBs worth $14.6 billion are due for repayment next fiscal after $12.5 billion in the current one. With a significant portion of these borrowings un-hedged, a sharp rupee depreciation could make the situation worse.

Economic impact on India would be particularly severe at a time when it is already slowing down.

External demand would shrink as exports have a close correlation with world trade growth. For instance, world trade grew 15% in value terms in 2008, while our exports grew 30%. In 2009, when world trade declined 22%, our exports also declined 15%.

Global trade contraction is highly likely in the event of synchronised recession in major global economies. Investment cycle in India would be hampered severely and even domestic consumption would be adversely impacted on account of a loss in confidence.

This week, therefore, is crucial as the financial markets closely follow whether Greece indeed receives the financial support it requires to avoid a default for now.

The writer is senior economist, Royal Bank of Scotland NV and can be reached at gaurav.kapur@rbs.com. Views are personal.