The mechanics of a Greek exit
Phase 1: Announce exit, close Greek banks, determine exchange rate
There is no clause in the European Treaty that would allow the other eurozone members to force a country out of the euro. It is ultimately up to Greece to decide whether to exit or not. The first step would be to determine the exchange rate of the new drachma, to re-establish the Greek central bank's powers, and to immediately close Greek banks for a few days. This would give the banks time to make changes to their systems and to try to hold off the inevitable capital flight.
Capital flight is when investors move their money from an economically or politically risky country to one that's more stable. In the first quarter, overall Greek bank deposits fell 11.7 billion euros ($14.8bn). The chart below shows that almost 40% of overnight deposits have already left Greek banks since the end of 2009.
Source: European Central Bank
In order to prevent further capital flight, the announcement of a return to the drachma would have to be a surprise and the return would have to be executed essentially overnight. If people have enough time to transfer their money out of Greece, it could push Greek banks towards a collapse. The temporary closing of banks would have to be accompanied by capital and currency controls in order to limit how much money citizens could withdraw from bank accounts or take out of the country. There might also be limits and/or tax penalties for transferring funds abroad.
But Greece is only part of the problem. We are already seeing a slow-motion bank run on the much bigger Spanish and Italian banks.
Source: European Central Bank
Two powerful tools to stem capital flight would be a pan-European deposit insurance similar to the US Federal Deposit Insurance Corporation (FDIC), and the provision of a banking license to the European Financial Stability Facility/European Stability Mechanism (EFSF/ESM) so it can directly recapitalize banks. Ratification would require parliamentary approvals, and could therefore take a while to get implemented.
Phase 2: Convert holdings in euros to new drachma
In this phase, all savings and checking accounts, credit card debt, pensions and life insurance policies, mortgages, and company balances and contracts would have to be converted from euros to drachmas.
