How Greece’s Exit From Euro Could Happen

by Nikos Chrysoloras, James Hertling

12:01 AM EET

March 26, 2015

(Bloomberg) -- With the fight to keep Greece in the euro now in its sixth year, everyone is running out of patience. More importantly, Prime Minister Alexis Tsipras’s government in Athens is running out of money.

While bond yields suggest investors expect Greece to stay in the euro, economists such as UniCredit Bank AG’s Erik Nielsen say it may be just a matter of time before he’s forced to print a new currency.

Adopting the euro was always supposed to be a one-way ticket, so there is no legal precedent or political roadmap for an exit. If you’re waiting for a formal announcement of a clear resolution, you may be waiting a long time.

Next steps for Greece range from retaining the euro to catastrophic divorce; half-measures like having multiple currencies circulate, with aid recycled to repay foreign-currency debts, are also in the cards.

Equally unclear is who would tell the world -- and how -- that Greece has entered an economic afterlife. Possible messengers include Tsipras, the European Central Bank, European Union President Donald Tusk and European Commission President Jean-Claude Juncker, among others.

The following are potential scenarios, based on interviews with economists, investors and former policy makers:

SCENARIO A -- GREXIT AVOIDED

Tsipras, whose Syriza party won January elections promising to undo the tough terms of the bailout loans, capitulates to creditor demands. His brinkmanship drained cash reserves and crippled Greek banks.

Faced with a choice between expulsion from the euro area or implementing austerity in exchange for loans, Tsipras takes the cash. The ECB maintains its support of the financial system.

While aid flows, the government’s days are numbered as his most hardline supporters mutiny. A new coalition is formed and backing from pro-European opposition parties keeps Tsipras in office -- or elections are called.

Greece’s membership of the euro is ultimately secured as new loans are used to repay the ECB and the International Monetary Fund and the country’s coffers are replenished. Greece gets easier repayment terms on bailout loans and more lenient conditions to tame the popular backlash.

SCENARIO B -- HOTEL CALIFORNIA

Greek Finance Minister Yanis Varoufakis has said membership in the euro zone is a bit like the lyric from the 1976 Eagles song: “You can check out any time you like, but you can never leave.”

This chain of events might follow if Tsipras fails to strike a compromise acceptable to stakeholders ranging from the German government to Communist factions of his Syriza party.

Bailout loans, Greece’s only source of funding, remain stalled. With Europe’s political leaders unwilling to proceed, the ECB rations Emergency Liquidity Assistance, the lifeline keeping Greek banks afloat.

That requires the imposition of capital controls -- as there isn’t enough cash to meet demand -- and probably a bank holiday.

We’re calling the two possible outcomes from here “somersault” and “check out.”

SCENARIO B1: SOMERSAULT

The dramatic consequences of capital controls -- limits on withdrawals and transfers -- force Tsipras to compromise. Opinion polls show that most Greeks -- between two-thirds and three-quarters of the population -- want to stay in the euro area “at any cost.”

Tsipras forges a new coalition with opposition lawmakers of pro-European parties. A referendum, carried out amid capital controls and with banks shut, gives him a mandate to reverse course. A unity government is formed and Greece remains in the euro but not before the disruption triggers a new recession.

SCENARIO B2: CHECKING OUT

With banks shut, the political situation deteriorates and a popular uprising intensifies, with Germany targeted as the country’s main antagonist. Polls show a swing in favor of breaking from the euro area.

Capital controls give the government the space and time to print either a new currency or IOUs for domestic payments. The new scrip quickly plunges, reflecting the weak fundamentals of an economy that has shrunk by about a quarter since 2008.

Euro-area governments give Greece a “sweetener,” a loan in hard currency. The rationale is to avert total economic collapse, which would create a failed state in a strategically critical region.

Greece’s debt to public entities is restructured, providing for the repayment of loans to the IMF, either through the euro area’s crisis fund or from the departure credit. Greece remains shut out of debt markets.

Most Greek companies and banks default. Some bank deposits are seized to recapitalize a shattered financial system. The sovereign debt restructuring of 2012 has already ensured that the state won’t have to pay principal on most of its existing loans to private investors and the euro area for the next few years and until the economy stabilizes.

The new paper and the euro both circulate. Greece hasn’t officially left the euro zone -- the door is open to a return in good standing -- though the country sputters in a financial purgatory.

SCENARIO C -- ‘C’ FOR CATASTROPHE

Greece separates from the euro area in a messy default, amid demonstrations, deepening misery for most and the government blaming everything on the Germans.

No help is provided to support a new currency and to keep servicing bonds and IMF debt. That triggers cross-default clauses to all creditors. The government and banks collapse, meaning that years will be needed before a new structure emerges.

Greece’s economy plunges into a second depression. The blow from the biggest default in the history of capitalism drives Europe back into a recession and heaps pressure on vulnerable euro countries such as Italy.

Bad blood leads to Greece’s departure from the European Union. The idea that the euro is irreversible is thrown into question, rattling global markets.

The economic implosion paves the way for extremists, from either the left or the far right, to take power. Those who can, flee the country.

The tumult casts doubt on Greek membership in NATO. A new - - and unstable -- government turns to Russia for support, providing a Mediterranean outpost for Vladimir Putin.

To contact the reporters on this story: Nikos Chrysoloras in Athens at nchrysoloras@bloomberg.net; James Hertling in London at jhertling@bloomberg.net

To contact the editors responsible for this story: John Fraher at jfraher@bloomberg.net; Heather Harris at hharris5@bloomberg.net Ben Sills