Greek default within the euro is the only real option

by Robert Jenkins

Financial Times
November 7, 2011

It was a possibility feared but unspoken – until last week. Suddenly a Greek exit from the euro was on the table. “Are you in or are you out?” Many Europeans no longer care. They should. Their leaders do. Here is why.

Greece will restructure. It can do so “within the euro” or it can do so “outside the euro”. The difference is crucial. If you already understand the distinction, stop reading here. If not, you may soon wish you had. For here is how an exit of Greece from the eurozone would play out:

1: The Greek cabinet decides an exit. Rumours begin to circulate. Greek citizens withdraw their euro deposits while they are still euros and not drachmas; supplies of banknotes run short; businesses shift their euro balances abroad. Foreign lenders to Greek businesses cancel credit lines. Banks close their doors.

2. Following an emergency cabinet meeting, the Greek government announces the new drachma. Capital controls are imposed and border patrols dispatched to enforce them. Public sector debt is redenominated in local currency. The value of the drachma plunges. Greek inflation soars.

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