GREXIT SCENARIO

Preventing a Greek exit is still desirable. Politically it is much easier to renegotiate a compromise with Greece, albeit a lame one, and thus maintain the fiction that Greece will pay back its loans at some point of time.

Scenario

1. Grexit would be accompanied by a default: The Greek government would try to re-dominate its debt into the new national currency (e.g. the new drachma) which would constitute an implicit default. Over and above this, there would probably be an explicit default as well. The key questions are: When would it a default; and what would the default be called?
2. Managing without printed (and minted) versions of the new drachma: Most transactions in a modern economy are electronic- including payments by credit and debit cards. For the small proportion of transactions (by value) carried out with notes and coins, the simplest thing would be to use the existing euro versions. Over-printing these with some Greek national symbol to indicate that they were now drachma would be unnecessary and ineffectual. Over-printing would not alter their value and acceptability elsewhere in the Eurozone. 
3. New Greek currency on the exchanges: The idea is to lower the cost of Greek output and hence exports in terms of other currencies (including the euro) at a stroke. This is the same thing as what the policy of domestic deflation is meant to achieve but with a devaluation it happens instantly as opposed to the long, laborious and painful process involved in domestic deflation.
4. Wages and Prices: It would be largely up to the Greek government to ensure that wages and prices do not increase. If if it happen then the devaluation would be nullified. If not, there would be a boost to aggregate demand as Greeks substituted domestically produced goods and services for foreign ones, and foreigners were encouraged to buy Greek goods and services (including holidays) over their equaivalents produced elsewhere.
5. Closing of banks and financial markets for a transition period: It all depends. If departure were carried out over a week-end, then it might not be necessary to close the banks, but special arrangements would need to be made with regard to cash machines. If the process of making all the necessary arrangements takes longer than two days, then the banks would have to be closed for a period. But that would be a minor, short term problem rather than a major issue.
6. Grexit Impact: European finance officials point out left and right that Greece's exit from the Eurozone is not a risk for the common currency. This is bluff, of course. The Eurozone would bruise if Greece is forced out. A Greek exit from the Euro would be very difficult for the European economy. And at this fragile moment, even the slightest of bruises in the already falling currency would cause damages. 
7. Grexit Timing: It is too early at present. Grexit could be forced, or even be the accidental outcome of a slalemate, rather than a deliberate, calculated decision.

Greece’s bailout programme expires at the end of February. If Athens doesn’t ask for an extension, it will be left without financing just weeks before it must repay loans to the International Monetary Fund on March 15.  Mr. Tsipras and Finance Minister Yanis Varoufakis have pushed for temporary financing that could replace the existing programme until a new a bailout agreement is reached with the eurozone and, possibly, the IMF. But that option faces stiff opposition from the other eurozone nations. Athens wants to replace some “structural reforms” such as overhauls to its labour markets that are prescribed by the current programme. Labor-market regulations are shaping up to be a major sticking point. Mr. Tsipras’s government opposes further changes to Greece’s labour laws that would make it easier to hire and fire workers and renegotiate their wages. Greece’s creditors say those reforms are vital to making Greece more competitive in the global economy. Athens also wants to run a lower government budget surplus, excluding interest payments; the current bailout will require that surplus to be 4.5% of gross domestic product from next year and for many years after that.

The question is where the money to pay for that change will come from. The other eurozone governments don’t want to lend more to Greece. They may lower interest rates on loans already made to Athens, but that won’t yield much extra financing for Athens.

Morgan Stanley gives these probabilities of what will happen in the days and weeks ahead:

• Greece eventually goes back to the bailout programme: 55% likelihood. In this scenario Greece gets no haircut on its debts (which the government wants), it gets its international funding but also has to implement continued austerity and economic reforms.
• Greece has a "staycation": 25% likelihood. This would mean Greece implements capital controls - strict rules that halt the outflows of money from banks - like Cyprus did during its 2013 crisis.
• Greece leaves the eurozone: 20% likelihood. Without European assistance, the life support Greece's banks are on is pulled away. It's hard to say exactly what the risk of a Greek banking collapse is to the rest of Europe.

The Economist Intelligence Unit puts the Grexit risk at more like 40%. No country has ever left the euro before, so there are huge unknowns here