Unless Greece can reach a deal with its major creditors the IMF and the Eurozone before the end of the month it will be unable to pay its debts and will fall into a sovereign default. Should this happen, the viability of Greece as a member of the Eurozone will become utterly untenable and one of two things will happen: either it will be suspended from the Euro temporarily or it will formally leave the currency. Either scenario will require that Greece adopts its own currency which will rapidly devalue against the Euro and all other major currencies. The national debt will remain Euro-denominated, of course. The cost of Greek exports will plummet if they are priced in the new Greek currency which will boost absolute export volumes, but may not increase currency inflows (in equivalent Euros) depending upon how much the currency devalues. Currently, Greek exports are worth roughly €2.2 billion per month.
On the other side of the coin, Greece imports about €3.8 billion per month and if Greece leaves the Euro, the relative costs of such imports will sky-rocket as the new currency depreciates. Within the country, salaries and pensions would convert to the new currency (unless they were fortunate enough to be sourced from abroad in a hard currency, of course). It is highly likely that inflation would take off in the Greek economy if for no other reason than the price of imported goods would rise. Any Euro denominated personal debt from lenders outside of Greece, mortgages or loans denominated in Euros of Swiss Francs, for instance, would go through the roof, with borrowers being put under enormous pressure to make the existing level of hard currency repayments in a weak, new Greek currency.
Having shown that the nation has no intention to honour its existing obligations by opting for sovereign default rather than sticking to agreements made by previous Greek governments, Greece would be faced with huge difficulties and punitive interest rates to borrow money on international markets. Furthermore, any debt obligations taken out in a new Greek currency are likely to drop in value as the currency devalues, so lenders would be putting their capital at risk in such an investment. Conversely, if Greece borrowed in a hard currency it would have to absorb higher repayment costs as its currency devalued.
On the positive side, Greece should see a surge in tourism as it becomes a lot cheaper as a tourist destination for the rest of the world.
Talks are still going on, but the Greeks rejected proposals submitted to them by the EC. Counter proposals have been submitted by Greece and whilst EU Commissioner Pierre Moscovici said a debt deal was close and needed a "happy ending", a meeting between the IMF and Greece broke up last night since major differences remained between the two sides and they were "well away from an agreement" according to IMF spokesman, Gerry Rice.
The Greeks still seem to believe that if they leave the Euro, it will mark the beginning of the end for the currency – this represents a total misreading of the situation. To quote former F1 ace Graham Hill shortly before his death in an air crash “Time is of the essence, and I am very short of essence”…