From this morning’s Morning Briefing from BNY Mellon:
“…we need to start preparing for the possibility that Athens might end up exiting the single currency. It therefore seems prudent to revisit our discussion from a few months ago as to what a Greek exit could entail. Unsurprisingly, debate over this issue has raged amongst both academics and commentators. However, some common themes do emerge:
1. The announcement would have to come as a “surprise.” As a result it would presumably take place after the markets had closed on a Friday evening. It also seems likely that markets would remain closed for a number of days following the weekend in order that the bare minimum of financial plumbing could be carried out. A number of other announcements would have to take place at the same time.
2. The first would be that withdrawals from banks would have to be significantly limited to prevent a run. Concurrently with this capital controls would be introduced (along with travel curbs). However, although capital flight would certainly be a threat to the Greek economy, it could be argued that this might not be quite as catastrophic as might initially be imagined. In particular, it seems reasonable to suppose that any money looking to leave Greece has already done so given how long this crisis has rumbled on for (two years and counting). Indeed, the NYT reported in November that Greek banks have already lost USD 63.5 Bn in deposits.
3. Given that Greece’s sovereign and private debts are currently largely denominated in EURs, this would likely prove the most worrying issue given that wages would have to be redenominated into the new currency. As the WSJ noted, domestic debt contracts would have to be redenominated rapidly so as to prevent the bankruptcy of most households. Private borrowers with debts outside Greece would not be able to re-denominate them in the new national currency and many would go bankrupt or default. As a result a massive support operation for the private sector would need to be launched including the recapitalization of the domestic banking system (presumably via the Bank of Greece).
4. An attempt would also need to be made to provide temporary banknotes until permanent new notes could be introduced. A number of suggestions have been made including the “overstamping” of existing banknotes.
5. If no further aid were forthcoming from the EU/Eurozone then the government would need to introduce a balanced budget given that it would be entirely unable to borrow on the capital markets.
6. With the threat of inflation hovering in the wings, it is entirely possible that price controls could be reintroduced on a temporary basis.”
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