License article

Greece's options: a rock, a hard place, and oblivion

Whether Greece is in or out of the eurozone, its future remains grim.

RUNS on banks. Mattresses stuffed with cash. Borders closed. Hyperinflation. Riots. Shortages of food, medicine and oil.

It's not hard to envisage disaster scenarios for Greece if it exits the euro currency and returns to the drachma, a possibility that has spawned a new phrase: ''Grexit''.

There are roughly three ways it could happen. First, Greece could voluntarily leave. Second, other eurozone nations could eject Greece. Or, third, perhaps most worrying at present, it could happen by accident through a widespread run on Greek banks.

On the first scenario, Greece may simply admit it is insolvent, refuse to meet the harsh terms of European bailout funds and stop paying its debts. This would essentially reset its debt to zero. But, because Greece continues to run annual budget deficits, without bailout funds the government would soon run out of money for wages, likely resulting in civil riots.

Greece would need to come up with a new way to pay its bills. It would have to fire up the printing presses and issue drachmas - overnight or on a weekend to stop bank runs. Authorities might have to close borders to stop Greeks taking flight with cash. The new drachma would plummet in value, obliterating the savings of ordinary Greeks. Import prices would soar, including for oil, medicine and food. The government would likely have to print more money, resulting in hyperinflation.

On the upside, Greek exports would become more competitive. Tourism exports could soar as it became vastly cheaper to holiday in Greece than, say, Turkey. But with unrest, would holidaymakers really want to? And in the medium term, the Greek government would still eventually have to bring its budget back into balance, and this would require unpopular budget cuts.


There is a reason most Greeks, when asked, continue to support Greece remaining in the eurozone. But with one in four working-age Greeks unemployed, and one in two youths out of work, it is also not hard to understand why two-thirds of Greeks voted in recent elections for parties with an ''anti-austerity'' platform.

But can they have it both ways? Can Greece reject harsh austerity measures and stay in the eurozone? The rest of Europe says ''nein'' to renegotiation, threatening to enact scenario two: boot Greece out.

But pushing Greece out would only lead to concern about which weakling euro economy might be next … Spain? Portugal? Italy? The fear of disintegration could freak out capital markets and raise the cost of borrowing for nations such as Spain and Italy and lead them to default. Stronger countries, like Germany, fear a return to their former currencies, which would rocket in value and undermine their exports.

In truth, it's all an elaborate game of chicken. Neither Greece nor the rest of Europe wants it to leave the eurozone. Most likely they will come together to renegotiate the severity of austerity measures imposed as a condition of bailout funding.

The problem is, the longer political uncertainty continues - and a Greek election is not slated until mid-June - the more likely scenario three becomes: a messy exit of Greece sparked by a massive bank run. Greek depositors have already begun to withdraw their money from Greek banks. Traders are readying for the return of drachmas, getting software in order to process new currency trades. Futures traders are starting shadow markets in drachmas, which, on some estimates, could trade as high as 1500 to the euro, compared to 340 before Greece adopted the currency.

The best way to stop potential bank runs would be for European leaders, through the European Central Bank, to step in and guarantee all deposits, something they have been extremely reluctant to do.

The prospect of mutually assured destruction is a powerful motivator and European leaders may yet stumble forward towards a lasting peace. But if they fail, Europe could indeed go nuclear.