WHAT WOULD GREECE'S EURO EXIT LOOK LIKE?

In the worst case scenario, Greece's Euro Exit starts off messy. The government resurrects the Greek currency, the drachma. In this case, salaries and prices within Greece would be converted from euros to drachma, and the drachma would be allowed to depreciate to make the Greek economy more competitive. But currency markets would treat it differently. Banks' foreign exchange experts expect the drachma would plunge to half the value of the europ soon after its debut. For Greeks, that would mean surging inflation 35 percent in the first year, according to some estimates. Greece would have to pay more for imported oil, medical equipment and anything else coming from abroad. The Greek Central Bank would also need to print more drachmas once the country got locked out of lending market. That's one reason analysts say the switch to a drachma would lead the country to default on its government debt, possibly triggering losses for the European Central Bank and other international lenders. Most assume foreign banks would have to write off loans to Greek businesses too. Why would Greeks pay off foreign debts that effectively double when the drachma drops by half?

The European Central Bank and the European Union would have to persuade bond investors that they will keep Portugal, Spain and Italy from following Greece out the door. Otherwise borrowing costs for those countries would shoot higher. If they fail to reassure bond investors, all of the nightmare scenarios come into play. If Greece dropped the euro, traders would become more suspicious of Spain, Portugal and Italy and sell those countries' government bonds, pushing their prices down and driving their interest rates up. Higher borrowing costs would squeeze those countries' budget and push them deeper into recession. Plunging bond prices would imperil Europe's already troubled banks, which stockpiled government bonds when they were considered safe. At this point, the risk would be high for a run on banks throughout Europe. People would stampede to their banks to withdraw what they can.

If the crisis got worse the Spanish or Italian governments couldn't borrow enough cash from investors to save the day. They can't afford to guarantee deposits or money market balances. They don't have the ability to borrow internationally from bond markets. Where are they going to get funds??? From here, the crisis could easily snowball: Banks could fail, the surviving banks could stop lending to each other, and a credit freeze could shut down Europe.