Greece could revert to the drachma -- the currency it had before entering the euro in 2001 -- but there is also speculation it could operate with a Greece-specific euro until a full switch can take place.
If Argentina is used as a guide, this could be announced over a weekend. The banks could then remain shut for a fortnight while the currency transition is bedded in.
At this point capital controls would need to be in place to ensure money in the country stays there. This could be done in co-ordination with other euro countries, or unilaterally.
According to a Bank of America/Merrill Lynch note, Greek banks have lost 30% of their private sector deposits since their peak in late 2009. Such capital flight is likely to be increasing and the fear -- as articulated by Papoulias -- is that an emotional response to the crisis will create even greater problems.
As UBS's Paul Donovan, notes, "talk of firewalls and guarantees disappears in a puff of smoke if the challenge for banks is not liquidity, nor solvency, but an existential crisis."
The new currency would be worth significantly less -- estimates put it at perhaps 50% -- than the euro. According Bank of America/Merrill Lynch, the country could then issue IOUs to pay salaries and recapitalize the banks. This, however, would risk the creation of a "shadow currency." The note adds: "How long Greece could be within the euro and live with its own internal currency is an open debate."
Once the new currency is in place, mortgages to Greek banks would likely be repaid in drachma, while repayments of mortgages to foreign banks may have to be renegotiated.
The biggest issue could be foreign banks' loans to major Greek businesses. Debt which was previously due to be repaid in euros would have be renegotiated in drachma. Legal disputes are likely to ensue as creditors battle to get back as much money as they can.
Greece's Syriza party -- which wants to remain in the eurozone but does not support the bailout program -- has thus far reaped the benefits of voter frustration with the austerity measures. It bumped out mainstream party PASOK to come second in the May 6 election, with almost 17%. Opinion polls indicate it could come first in the next election.
New Democracy, which supports the program, narrowly won the May 6 election with almost 19% support. It could get a boost if sentiment shifts and fear of a euro exit drives Greeks back to the mainstream parties. If this happens, the crisis could ease.
Will affect Greece exit the euro
The negative effect of a hypothetical infected out of Greece in the euro zone could affect corporations in Europe, but only if it becomes “uncontrolled” way, said agency Fitch. “Uncontrolled” out of Greece in the euro zone would have a comprehensive impact with the potential to lower the corporate credit ratings in Europe, the greatest negative impact can have on companies from Spain, Portugal and Italy. A “controlled” out of Greece in the euro zone would have a limited negative impact on other “peripheral” Euro zone state agency Fitch.
Any departure from the Euro zone is likely to be very difficult for the Greek corporations, which is a prerequisite for serious destruction to the country’s economic growth and international capital flows to it. This will probably force many Greek companies to approach or even bankruptcy.
In a broader term, lower growth and weaker access to capital (including direct sovereign capital) can lead to pressure on the ratings of the rest of corporate Europe, warned agency Fitch. The extent of this negative impact (of a possible exit of Greece from the Euro zone) will depend on the effectiveness of a common European policy response to such an event. In the “controlled” leaving Greece, contagious effect to the rest of the euro zone would be limited, while the “uncontrolled” exit will lead to expansion of market turmoil and destruction and more harsh and severe outlook for economic growth. In both cases, countries with rescue programs (Portugal, Ireland and Greece) and countries such as Spain and Italy will bear the burden of such an event, said the credit agency.
The so-called "contagion effect" remains the greatest fear. Allowing one country to exit the euro opens the floodgates for others to follow. This risk will push up the premium attached to buying sovereign debt of troubled eurozone economies -- such as that of Spain and Italy, whose ten year bonds are nudging toward the "danger zone" of 7% yield -- on the back of the uncertainty.
According to Michala Marcussen, of Societe Generale, the direct costs of Greek euro exit would be huge for Greece, but manageable for the rest of the bloc. "Our concern is contagion," she wrote in a note. The note said a forceful policy response would be needed in the case of a Greek exit, such as further strengthening of the bloc's bailout fund.
A Greek exit could also trigger shifts in geo-political influence, as countries such as Russia may step up with financial assistance. According to James Nixon, of Societe Generale: "The risk is we may lose Greece from the Western sphere of influence."
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