Greece's decision to call a second, anti-austerity election has taken the country one-step closer to a dangerous exit from the eurozone. Below we sketch out how the process might unfold.
Q: How would Greece leave the euro?
A: No-one knows for sure because it would be unprecedented. There was no legal mechanism put in place for a country to exit the eurozone when the single currency was created. The most likely scenario would involve the Greek authorities privately agreeing a date with the rest of the eurozone, the European Central Bank, and the International Monetary Fund, to formally exit. They may decide to announce the decision after the markets have closed, possibly on a Friday evening, to give investors a chance to digest the news.
Q: What would happen to the currency?
A: Greek euros would be converted into a new currency, probably the drachma. Euro notes would be stamped while drachmas were being printed. After setting an initial conversion rate for the new drachma, at say 1:1 to the euro, the exchange rate would be dictated by currency markets. The drachma would immediately fall sharply.
Q: What would happen to the country's debt?
A: Domestic debt would be converted into drachmas. A complicated legal row over whether Greek's external debts would remain denominated in euros or be converted into cut-price drachma would ensue. Money owed by the Greek Government to its bondholders, and money owed by Greek banks to the European Central Bank, would be the subject of renegotiation and restructuring. Greece would continue to be locked out of capital markets, and would require new IMF loans against fresh collateral.
Q: What would happen to the banks?
A: Capital controls would be put in place to prevent a chaotic run on Greek banks. Money is already being withdrawn from Greece and invested elsewhere, or simply stuffed under mattresses. The ECB liquidity tap would be switched off, and banks would not have access to wholesale markets. Greece would have to recapitalise and potentially nationalise its banks.
Q: How much would a Greek exit cost?
A: It is near impossible to put a figure on how much a 'Grexit' would ultimately cost. The Institute of International Finance, which represents more than 450 financial institutions globally, has estimated it at around €1 trillion. The cost would be felt across the country, with Greece sinking even deeper into recession.
Q: What impact would it have on the UK and other countries?
A: The contagion effect would be enormous. A Greek exit would introduce the principle that countries can exit the euro. Fellow bail-out countries such as Portugal and Ireland would be put under renewed pressure, as would Spain and Italy. The ECB and its backers notably Germany would take a large hit. Although Britain's direct exposure to Greece is limited, it is indirectly exposed through its exposure to other euro countries such as France. This could put pressure on UK bank funding costs, further restricting credit availability and pushing up borrowing costs for households and businesses. Confidence would be knocked, trade with the region hit, and a recovery further delayed.