How would Greece leave the euro?

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Members of Neo-Nazi party Golden Dawn celebrate after the elections
Image caption,
Far-right group Golden Dawn celebrate after joining parliament, and they are not pro-European

A "drachma" is an ancient Greek currency unit and translates as a "handful", which is a lot less than what Greece will need to pay off all its debts.

For two years, everyone has been asking what would happen if Greece left the euro and went back to the drachma.

Now that time may be upon us.

With Greece unable to devalue its currency, the country is hobbled with crippling debt payments it cannot afford.

Even though it has cut its debt in half, Greece has been subject to much social unrest as five years of recession and bailout-imposed spending cuts have bitten hard.

Last week, a majority of Greeks voted for parties that want to rip up the country's bailout agreement with the European Union and International Monetary Fund (IMF) - including neo-Nazis.

The biggest winner was the leftist anti-bailout coalition, Syriza, whose share of the vote more than tripled and who describe the austerity imposed by the bailout as "barbaric".

Syriza is among those holding talks about forming a government, one that rejects policies of austerity, and if it comes to pass, a Syriza-led government will definitely not adhere to the terms of the bailout.

So how would Greece leave the euro?

No big announcement

In reality, the new prime minister probably will not announce it on TV one day, between broadcasts of the lottery and the football.

The new government will want to renegotiate some parts of the bailout, but if that doesn't happen, then Greece could simply stop paying its debt.

That would be a euro default.

Actually, a second, as Greece technically defaulted on its debts when it renegotiated a 50% write-off of its debts with its creditors earlier this year.

And that would put the ball back in Brussels' court - do the other 16 nations want a defaulter in the euro?

Last year, the French leader Nicolas Sarkozy told the Greeks: "Abide by the eurozone rules or leave."

Since then, Mr Sarkozy has himself been shown the door.

Still, one major issue is that there simply is no mechanism to leave the euro.

It was never envisaged by the bright-eyed politicians who created the impetus for the currency, which debuted in 1999.

"The treaty doesn't foresee an exit from the eurozone without exiting the EU," the European Commission has said.

This is the Maastricht Treaty from 1992, which led to the creation of the euro.

The option of leaving the EU was only added in Article 50 of the Lisbon Treaty in 2007.

So under its current obligations, for Greece to exit the euro or be thrown out, it would have to leave the EU.

Leaving is straightforward: it involves a member state notifying the European Council - that is, the leaders of EU countries - that it wants to go.

The Council then agrees the terms of the exit via a qualified majority.

Would leaving the EU be the end of the world for Greece? Probably not.

The key part of Article 50 involves "setting out the arrangements for its withdrawal, taking account of the framework for its future relationship with the Union".

Iceland, Liechtenstein and Norway all do fine and they are not in the EU. They are part of the European Economic Area, meaning they get access to the single market.

Switzerland is not even a member of the EEA and it trades with the EU with few problems - the odd tax dispute aside.

But again, the chaos of going from inside the EU to a country outside of it, but still slap bang in the centre of Europe, could possibly be even worse than what it is going through right now.

Peter Dixon, an economist at Commerzbank, says: "What happens then is that the cure ends up being worse than the disease."

New old currency

Regardless of whether Greece leaves or is thrown out, it will be in the "nuclear option" phase, involving the introduction of a new currency - the new drachma.

It would not be easy to make a new currency either, according to UK-based firm De La Rue, which prints everything from the UK's sterling to the newest version of the currency in Iraq, the dinar.

So how long does it take to plan and introduce new notes and coins?

"I don't think you could do it much faster than four months," Mark Crickett, one of De La Rue's consultants, told BBC Radio 4 Analysis' Chris Bowlby .

There would probably be an interim period - those four months - during which a temporary national currency would be used.

And you would sit back and let supply and demand do what it does. In this case, probably more supply than demand.

"The new currency would fall through the floor and inflation would go through the roof," Mr Dixon says.

It would be a legal minefield, as basic financial transactions such as mortgages would have to be redenominated. But that would not be the end of it.

"Living standards would be hit hard. It might seem like an attractive option, but the short-term costs are massive."

Wouldn't banks - who have already agreed to take a "haircut" of 70% - just accept the devalued new drachma-denominated debt?

"Well, no, because it may well halve in value again," Mr Dixon says.

The assets of banks inside Greece and those outside holding Greek debt would be devalued. And of course, they would not be able to borrow commercially.

Greece would probably have to impose capital controls to prevent all the money leaving, much as Malaysia did in 1998 after the Asian financial crisis.

So in the best-case scenario, Greece would have no buying power, everything would be extremely expensive and it would also be broke.

Lessons of the past

But the idea is that, with its currency so weak, Greece's economy would grow rapidly.

People often use Argentina as a comparison of such an outcome, which Nobel-prize winning economist Paul Krugman has said is "an imperfect parallel".

Argentina, which had its peso linked to the US dollar, defaulted on $102bn of debt during a financial crisis in 2001-02.

In 2005, the country persuaded 76% of creditors to accept a debt swap that reduced the value of their bond holdings by nearly two-thirds.

But Argentina had to go through years of pain, and at least had the advantage of its own currency. The mechanics of de-pegging were easier. And it is still unable to borrow in the international debt markets.

Greece has to start afresh.

One comparison is Iceland, which in 2008 had a run on its currency when its banks failed.

The Icelandic krona lost more than half its value in one summer. It quickly faced interest rates at 15% and inflation at 14%.

But Mr Dixon suggests the closest recent parallel to a euro exit might well be the splitting of Czechoslovakia.

In February 1993, the Czechoslovak koruna was split into the Czech koruna and the Slovak koruna - at a par of one-to-one. (One version no longer exists; Slovakia adopted the euro in 2009.)

But in that scenario, as with the replacing of all the major currencies of Western Europe with the euro, people had time to adjust to the concept of a new currency.

"You had a long period of time to get used to the single currency," Mr Dixon says. "You're not going to to get it the other way around."

And the question would then become whether a queue would form at the door to leave the EU.

Will there be more elections in the peripheries of the eurozone? Would we then get the new punt? The new escudo? The new peseta?