Will Greece leave the euro? A look at its options

Stay or go? The time is approaching for momentous decisions for Greece and the nations using the euro currency.

Athens must pay 1.6 billion euros ($1.8 billion) off its debts at the end of the month to avoid a possible default and secure its cherished place among the 19 countries using the single currency for a little longer.

Greece needs new financial aid from creditors to be able to make the June 30 date with the debt collector. A deal is still nowhere in sight, though, with both sides refusing to compromise over what reforms Greece should make in exchange for more loans.

Will Greece do the unthinkable and leave the euro, or be forced out? Is it even possible?

Here are some questions and answers on Greece’s future. They could come in handy during Thursday’s meeting of eurozone finance ministers in Luxembourg.

How does a country leave the euro?

Technically, it can’t. These are uncharted waters. European Union treaties legally allow members to leave the 28-nation EU, but no mechanism was foreseen to let countries leave the euro. Theoretically, if all 19 nations agree that it’s time for Greece to go then a ‘Grexit’ could be negotiated. Some argue the country might have to leave the EU altogether to leave the single currency.

When is the point of no return?

That would be when the European Central Bank decides to cut off emergency credit to Greece’s banks, according to Zsolt Darvas, senior fellow at the Breugel think-tank in Brussels.

That could happen if there is a run on Greek banks — in which case the ECB might not want to risk its money supporting them. Concerns over a run on banks could grow if it becomes clear that Greece will default on its next debt repayment, due June 30.

The ECB could also cut Greek banks loose if the country defaults on debt repayments due to the ECB in July and August.

What would happen then?

Banks would probably have to close for a while and when they reopen, the government would likely put limits on how much money depositors can take out. “People would try to take their money out of the banks. The banks would not be able to pay,” Darvas says. “People would try to store their euros at home, not pay taxes, and the whole financial system would come to a halt.”

How can Greece avoid such a disaster?

Apart from pay its debts on time, some experts believe Greece could limit the damage by engineering its departure in secret. A small group of officials could make the exit preparations and then act on them almost immediately. They would inform their eurozone partners just hours before Greece walks out the door, according Roger Bootle, who heads the research analysis group Capital Economics. The public would be the last to know.

What money would Greece use?

Greece could go back to using the drachma or introduce a new currency. Either way, volume is essential, and that implies serious challenges. Iraq faced similar issues when it introduced a new dinar in just three months following the US-led invasion. “You would need a huge volume, very quickly. There’s also the transportation that is a very big challenge. A lot of police, troops would be required to attend to the cash needs of a country the size of Greek. Logistically it would be a huge challenge,” Darvas says.

What would happen to its debt?

Greece’s bills won’t go away, and the jury is out on whether they could be converted to a new currency, although Greece would probably try to redenominate and renegotiate the debt. The one advantage in this for Athens is that all kinds of loans would probably be written down by its creditors. But Darvas says that “all of these technical issues can be resolved. The economic costs of a euro exit — GDP fall and the rise in unemployment — will be far higher.” [AP]