The deadline for Greece to pay 1.6 billion euros ($1.8 billion) to the International Monetary Fund is Tuesday.
Should Greek leaders and creditors fail to reach an agreement, Buiter said capital and deposit controls will likely be enforced and Greece will enter default on its International Monetary Fund commitments. This would be a "huge negative" not just for Greece but for other heavily indebted peripheral economies, he said.
"The possibility of sovereign default would be back in the forefront of people's minds, and they would be asking, 'Who's next?'" he said.
However, he stressed that a Grexit would not be an event, but a process that could take months or years—one that could be reversed by a new government or coalition.
The specter of elections is indeed looming over Greece. Earlier this month, the ruling Syriza party's parliamentary spokesman said Greece's leftist-led government would hold early elections if its international lenders force it to accept a cash-for-reforms deal that violates its "red lines" or risk bankruptcy.
Locked out of bond markets and with bailout aid frozen since last summer, Athens is quickly running out of cash.
Money drained out of Greek banks following a breakdown in talks last week.The ECB has authorized increased emergency lending to Greece throughout the week, extending a lifeline to its banks.
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In the event Greece imposes capital controls Monday, the impact on stock and bond markets outside Europe's peripheral economies will be limited, he said. Central banks could potentially flood the market with liquidity in response, creating a buying opportunity in these markets, but certainly not in peripheral euro zone government debt.
"The risk will be mitigated, but it won't be eliminated," he said. "The flooding of the market with further liquidity which is likely to happen especially in the euro area would undoubtedly get into the other liquid asset markets, including bunds, including equities generally, and those might well perversely get a temporary lift."
"Medium and long term it is bad news, because as I said, the whole European integration process is at risk. Exit from the EU could become a more likely event as a result of the technically completely unrelated risk of Grexit."
As for the spillover effect on the Federal Reserve's timetable for interest rate normalization, the U.S. central bank can only respond to events as they unfold, he said. If Greece and its creditors kick the can down the road and eventually mint a new funding program, the Fed will proceed with plans for its first rate hike in nine years as if nothing happened, he said.
However, if the process blows up in Greece, scared investors will flood into the dollar, sending the greenback through the roof.
"That itself would become a seriously dampening factor to the U.S. expansion. As well, it is an inflationary factor," he said. "If it were actually to materialize, the safe haven demand for the dollar could cause the Fed to pause."