Grexit from the Euro is inevitable. Let us consider the consequences.
Why is Grexit inevitable?
(1) The amount of debt owed is not serviceable, no matter how much austerity, the debt far outstrips the GDP of the country.
(2) By lending Greeks more money; it would be throwing good money at bad
(3) The only way that Greece could potentially stay in the Euro is for the creditors to forgive ~75% of the debt which seems unlikely to happen
What caused this?
Bankers and Predatory lending upon joining the Euro; much like the sub-prime crisis in the US. Greece should never have been able to borrow 300+ Billion Euros at interest rates of 1.5%; their credit worthiness would warrant an interest rate of closer to 7%.
What would happen after Greece exits?
The entry of Greece into the Euro was an organised affair with a couple of years planning; everyone was prepared for the Drachma to be replaced by the Euro. However, the exit would have to be much faster; probably overnight and without much planning. If Greece goes back to the Drachma or some other currency that the finance department decides, several important questions need to be answered:-
(i) Who will print this money?
(ii) What currency will the printer of this money be paid in?
(iii) What will the conversion rate be for this new currency to all the currencies out there? Will it be free floating?
(iv) Will this currency need some reference to commodity or something with a store of value to avoid the currency to be ditched by everyone?
(v) Would the Greeks adopt some other already existent currency to be used instead of printing their own such as Swiss Francs or Renmenbi?
(vi) If they do use their own currency; it would likely be very unstable and may even experience hyperinflation similar to what happened in Germany in the 20s unless they had a strategy to back it up; maybe they could adopt something like the Rentenmark that Hjalmar Schacht created which backed the currency up with property
(i) If you are a Greek person with some savings in a bank in Euro, you will likely want to convert to a safer store of value. A number of options are available:- (a) Take out all that you have and store in cash, (b) Convert all that you have into a safer currency like swiss francs, (c) buy physical Gold or Silver, (d) move it outside of the country and buy property
(ii) The inability for the average Greek person to take out everything they have from the bank will likely cause massive social unrest and military intervention
(iii ) If people’s savings are diminished then this would cause mayhem
(i) They will likely go bankrupt maybe with the exception of one which would be nationalised
(ii) Some cashed-up foreign banks may want to buy up the local Greek banks without taking on any debt as long as they see a return on investment in the long term
(i) The 300+ billion Euro may never be paid back as such Greece would never be able to borrow money on International markets (at least for the next couple of years). In the banking world, time forgives
REST OF EUROPE
(i) The Euro will likely lose value as other holders of Euro convert to a safer currency
(ii) There will be further uncertainty on the weaker European countries such as Spain and Portugal, whether they would follow the same fate as Greece
(iii) If Spain / Portgual would leave then mayhem would ensue with the potential collapse of the Euro altogether and respective countries would have to return to their original currencies; this would be an unthinkable result with cataclysmic consequences
Based on the above, there are 2 outcomes:-
Some of the debt to Greece would be forgiven and Greece stays in (unlikely)
Greece exits the Euro and (i) currencies like Swiss Francs would rise further, (ii) commodities such as physical Gold and Silver would rise and (iii) Greece would go through a period of military government for about a year or so whilst the dust settles but in the longer term this would be positive for Greece as there would be more tourism and more investment as international investors sees value in what they are investing in and Greece would do much better thereafter.
This is the beauty of free market!