How a Grexit would work

Follow these 10 easy steps.

With only a day left for Greece to produce a financial rescue proposal, a Greek exit from the eurozone has never been more likely, prompting the European Commission and economists to game out what exactly it would look like.

Probably the best analysis was a 189-page work by Roger Bootle of Capital Economics, which won them the 2012 Wolfson Prize, the second-highest award for economists after the Nobel Memorial Prize.

Events have moved on a bit since 2012, but the conclusion still stands: Leaving the euro is doable.

One original recommendation was to do it all in secret, but that obviously won’t work. The next step is to bring in capital controls and close banks, something that Greece has already done.

While capital controls would stop money from fleeing Greece, the newly-empowered Greek central bank would have to provide liquidity to Greece’s banks — now without having to ask permission from the European Central Bank.

Once drachmas are back in circulation, Capital Economics estimates that they would need to drop in value by about a fifth in order to restore Greek competitiveness, “although some overshoot still seems likely due to initial uncertainty.”

A key issue will be what happens to Greece’s €323 billion in debt, most of it now owed to fellow EU governments and not to the private sector after a partial default in 2012.

The original recommendation was that Greece default on about half of its debt, but that is now more problematic because doing so would poison Greece’s relations with the rest of the EU. That means it would make sense to negotiate a write-down.

Another difference from 2012 is that years of austerity have actually improved Greece’s fiscal picture. Until this year’s recession, Greece was even running a surplus. After leaving the euro, the resulting downturn would probably mean a short-lived deficit, but in the end Greece might be able to finance itself after a Grexit.

In the end, Capital Economics argues that the result would be positive for Greece.

“Careful management of an exit that we still see as inevitable could yet mean that it ends up as a favorable economic development for both Greece and the rest of the eurozone,” it says.