'Grexit' - how does a country leave the euro?

Euro shop in AthensAFP/Getty Images

Amid political deadlock, the chances of Greece leaving the eurozone are growing by the day. For a long time this was unthinkable. But European leaders are now talking openly about the possibility of a "Grexit". For example, the governor of the Central Bank of Belgium talked about an "amicable divorce" (but would it really be amicable?)

Arguably, Greece should never have been in the euro in the first place. It's only 2% of eurozone GDP, so what ramifications would its departure from the currency bloc have?
A majority of City professionals now believe Greece will pull out of the euro by the end of the year, according to a Bloomberg poll conducted last week.

Greece has been without a government since the messy election result on 6 May inflicted major losses on the two mainstream parties. Political leaders are still in last-ditch talks to form a coalition government, but it's not looking promising. And a second election in June would almost certainly result in an even bigger protest vote.

No government, no bailout money, no ECB liquidity...
If Greece can't form a government or even if it does and the new government doesn't abide by the strict austerity rules dictated by the troika - the European Union, International Monetary Fund and European Central Bank - it will be cut off from any more bailout money. Greek banks would no longer be able to borrow from the ECB. The country would become isolated, with a "wall" going up between the euros held by Greek banks and the euros in the rest of the eurozone - that's how a new currency could emerge.

The Greek government would then pass a currency law and bring back the drachma, most likely in August or September, some analysts believe. It is possible that it has already cranked up the printing presses - before Slovakia broke away from Czechoslovakia in 1992, it made sure it had printed its own currency.

Others also believe the drachma could return by stealth, on financial markets to start with. Laura Kuenssberg, ITV News Business Editor, tweeted last night: "If enough people think the drachma may return, it becomes a commodity - traders expect it'd be 1500 drachmas to 1 euro, they joined at 350 to 1. Traders there reckon 'grey market' in drachmas could get going in a couple of days." She said she'd just been to a trading floor where they had built drachma into their systems.

Several analysts reckon that last week's €4.2bn payment to Greece might have been the last tranche of bailout money. If the taps run dry, Athens will go bankrupt and won't be able to pay pensioners, doctors, police and other public sector workers. More unrest on the streets would almost be a certainty, along with a run on the banks.

Argentina was the last country to experience this when it defaulted on its debts a decade ago. People got so desperate they started sleeping outside cashpoints to withdraw more money as soon as they were topped up. There were bloody protests, lootings of supermarkets... the government responded by freezing bank accounts and limiting the amount of withdrawals to 250 pesos, but none of this worked and the country slid into a sharp recession.

Argentina got through it all in the end partly because the world economy was doing well at the time. This is obviously not the case at the moment. So what would the economic impact on Greece be?

The doomsday scenario being painted by experts sees inflation shooting up to to 50%, mass unemployment, a wave of small firms going bust and a massive fall in economic output. Many, especially younger people, would follow the Irish example and emigrate. Those who stay could become so impoverished that the UN might be forced to intervene with food aid. The Greek banks would collapse and the government would have to create new ones, just like Iceland did during the financial crisis when its three major lenders went bust. But this would take time.

The question is would removing the Greek bad apple be good for the rest of the eurozone. Some, like senior currency strategist Jane Foley at Rabobank, believe the euro would benefit in the long run.

However, banks holding Greek debt would suffer huge losses and lose trust in other struggling eurozone economies. This could lead to another credit crunch, and it could mean that Spain and Italy are also forced out of the euro (Italy, the eurozone's third-largest economy, is too large to bail out). This would be the end of the eurozone as we know it - although it is feasible that a smaller version with Germany (and France?) at the core would survive.

Whilst talked about more openly, a Grexit would still be a huge shock for eurozone citizens and could easily trigger another recession in euroland. And Britain would not be immune from the fallout (the eurozone is its biggest export market).

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