What could happen next if Greece leaves the eurozone?

  • Introduction
    Speculation is again rife that Greece may soon leave the eurozone.

    Greece's parliament is voting on painful budget cuts and labour market reforms that must be passed in order for Greece to receive its latest round of bailout money. Prime Minister Antonis Samaras has warned that if the vote fails, the government will run out of money by 15 November and be forced out of the single currency. Even if the vote passes, the government still needs to implement the reforms - something the previous Greek government noticeably failed to do. Tax rates were raised, but the taxes were not collected. Promised privatisations were not carried out. Civil servants were suspended but not dismissed.

    If Greece once again fails to deliver, and if it were forced out of the euro, what is the worst that could happen? Click on the graphic to find out.
  • Greek debt default
    Unable to borrow from anyone (not even other European governments), the Greek government simply runs out of euros. It has to pay social benefits and civil servants' wages in IOUs (if it pays them at all) until a new non-euro currency can be introduced. The government stops all repayments on its debts, which include 148bn euros of bailout loans it has already received from the IMF and EU, and 113bn euros of bonds owned by private investors and the European Central Bank. The Greek banks - who are big lenders to the government - would go bust.

    Meanwhile, the Greek central bank may be unable to repay the 100bn euros or more it has borrowed from the European Central Bank to help prop up the Greek banks. Indeed, by the time Greece leaves the euro, the central bank may have borrowed even more from the ECB in a last-ditch effort to stop the Greek banks collapsing. Return to introduction
  • Bank runs

    Ordinary Greeks may queue up to empty their bank accounts before they get frozen and converted into a new currency worth substantially less than the previous one. The government would have to impose a freeze on withdrawal and on people taking money out of the country. Seeing this, nervous depositors in other struggling eurozone countries - Spain, Italy -may also move their money to the safety of a German bank account, sparking a banking crisis in southern Europe.

    Confidence in other banks that have lent heavily to southern Europe - such as the French banks - may also collapse. The banking crisis could spread worldwide, just like in 2008. The ECB may have to provide trillions of euros in rescue loans to the banks. Some governments may not have enough money to prop up their banks, meaning either the banks would go bankrupt, or Germany and other stronger eurozone countries would have to pay for their rescue.

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  • Business bankruptcies

    Greek businesses face a legal and financial disaster. Some contracts governed by Greek law are converted into a new currency, while other foreign law contracts remain in euros. Many contracts could end up in litigation over whether they should be converted or not.

    Greek companies who still owe big debts in euros to foreign lenders, but whose main sources of income are converted to a devalued non-euro currency, will be unable to repay their debts. Many businesses will be left insolvent - their debts worth more than the value of everything they own -and will be facing bankruptcy. Foreign lenders and business partners of Greek companies will be looking at big losses.

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  • Sovereign debt crisis

    Sovereign debt is the money a government borrows from its own citizens or from investors around the world. But if Greece leaves the eurozone, setting a precedent that such a thing can happen, then investors will become very nervous about lending to other struggling eurozone countries.

    This could leave the governments of Spain and Italy short of money and in need of a bailout. These two huge countries together account for 28% of the eurozone's total economy, but the EU's bailout fund currently doesn't have enough money to prop both of them up. Even France's government could get into trouble if it needed to pay for a bailout of its enormous banking sector.

    The ECB has offered to help these countries by buying up their debts, but only if they first submit to rescue packages from the IMF and other European countries. They will be reluctant to do so because spending cuts and tough economic reforms would be demanded in return.

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  • Market turmoil

    If a Greek exit caught markets by surprise - and many financiers believe an exit is now widely anticipated - then nervous investors and lenders around the world may start selling off their risky investments and moving their money into safe havens. Stock markets could plunge, while high-risk borrowers could face sharply higher borrowing costs, if they can borrow at all.

    Meanwhile, safe investments such as the dollar, the yen, the Swiss franc, gold and perhaps even the pound would rise, making their exports more expensive abroad. While safe governments such as those of the US, Japan, Germany and even the UK could borrow more cheaply. And it is not all bad news - the oil price may well fall sharply.

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  • Political backlash

    As eurozone governments and the European Central Bank face big losses on the loans they gave to Greece, public opinion in Germany may turn against providing the even larger bailouts that may now be needed by Italy and Spain. The ECB's role of quietly providing rescue loans to these countries' banks in recent months would be exposed and could become politically explosive, making it harder for the ECB to continue to prop up their economies or to provide the conditional government debt purchases it recently promised.

    However, the threat of a meltdown might also push the eurozone's governments to agree a comprehensive solution. This could range from dissolution of the single currency at one end of the scale to more integration through a democratically-elected European presidency tasked with overseeing a massive round of bank rescues, government guarantees and growth-stimulating infrastructure investment.

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  • Recession

    Crisis-stricken eurozone banks may be forced to slash their lending. Businesses, afraid for the euro's future, may cut investment. Faced with a barrage of bad news in the press, ordinary people may cut back their own spending. All of this could push the eurozone into a deep recession.

    The euro would lose value in the currency markets, providing some relief for the eurozone by making its exports more competitive in international trade. But the flipside is that the rest of the world would become less competitive - especially the US, UK and Japan - undermining their own weak economies. Even China, whose economy has slowed sharply of late, could be pushed into a recession.

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  • Greek meltdown

    Prime Minister Antonis Samaras has warned that living standards would fall by 80% within a few weeks of exit.

    Greece's banks would be facing collapse. People's savings would be frozen. Many businesses would go bankrupt. The cost of imports - which in Greece includes a lot of its food and medicine - could double, triple or even quadruple as the new non-euro currency plummets in value. With their banks bust, Greek businesses would find it impossible to borrow and to finance the purchase of some imported goods. One of Greece's biggest industries, tourism, could be disrupted by political and social turmoil.

    In the longer run, Greece's economy should benefit from having a much more competitive exchange rate. But its underlying problems, including the government's chronic overspending, may not go away.

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