Battle-weary traders in Europe are readying themselves for yet another fraught deadline.
The consensus view is that Friday's EU summit - where major changes to the fiscal rules in the eurozone are being debated - will provide another crutch for the wounded monetary union to limp on towards its eventual goal of solvency. However, beyond the strong rhetoric designed to calm markets' fears, even optimists have been forced to concede that understanding the unthinkable - the end of the euro - is now more than just an academic exercise.
It is a marginal risk, but it is a real risk.
Political forecasters and economists believe that Greece's exit from the single currency would begin with a run on the banks, as savers lose faith in their domestic financial institutions and try to move their money overseas. Many already have, with as much as a quarter of the country's deposits estimated to have gone offshore.
The country would face total economic collapse as money flees the country, leaving its banks bankrupt, without the capital to repay depositors, and the government would have insufficient funds to bail them out, and not enough assets to borrow from the European Central Bank (ECB), which is currently propping up the country's finances.
This is by no means unfeasible, according to Gabriel Stern, an economist at the brokerage Exotix, who said that the surprise is not that 25% of Greece's domestic savings have already left the country, but that 75% is still there.
"It's not economically rational in my opinion," Stern said. "Why would you keep your money in a Greek bank? Even if you think there's a 20% risk of leaving the euro, it still means you shouldn't keep it there. That's what [UK Central Bank Governor] Mervyn King said about [nationalised lender] Northern Rock. It isn't rational for the 75% who haven't fled yet to keep their money in."
"If that money comes out, the Greek banks haven't got enough to pledge as collateral."
The only credible option would be to implement capital controls, ending the flight but resulting in Greece leaving the single currency.
The forecasting company Exclusive Analysis has put together the likely scenarios for the cascade of events that follows a run on the banks. The government would declare an immediate bank holiday to stop depositors from flocking to branches. Foreign transfers would be stopped, meaning that Greek companies could no longer pay foreign suppliers and creditors.
The technocratic government would almost certainly collapse, to be replaced by another emergency government of national unity, whose first task would be to reintroduce the drachma as legal tender, giving it an initial value of €1. All debt issued under Greek law - mostly held by domestic institutions and by some European banks - would be converted into drachmas. This would technically constitute a sovereign default. Debt issued under international law would remain in euros.
Foreign payments would likely be suspended for several weeks, and individual citizens could be restricted in the amount of money they could withdraw in euros until the country's printing presses and banks could be mobilised to reinstate the drachma as a physical reality.
"This is exactly what happened in Argentina," Stern said.
10 years ago this month, Argentina defaulted on its debt and cut the peg that held the peso to the US dollar, allowing the currency to depreciate. It was an emergency measure that cut the country out of international capital markets for years, but ultimately paved the way for its revival.
"At that point you've hit the bottom," Stern said. "In Argentina the peso depreciated 80% in a few months. And Greece is much less stable than Argentina."
Currency devaluation and runaway inflation are just two of the immediate symptoms of leaving the euro. The value of the drachma against the euro would collapse, in theory making the country more competitive for exports and for tourism. The country would, most likely, go for a full default, rather than the 50% "haircut" negotiated in October.
"If they were to leave, it's likely that they would walk away with no debts whatsoever. They would start again," David Kerns, a dealing manager at foreign exchange dealer MoneyCorp, said.
The devaluation would make Greece very cheap for tourists from the core eurozone countries and from the UK - not unlike in its pre-euro days. Labour costs would fall dramatically, meaning that manufacturers of food and textiles may look to invest to take advantage of the country's proximity to major European markets.
To paint an exit as beneficial to Greece, however, is to underestimate the scale of the struggle the country would face to get back to where it was three or four years ago. The government spending and public sector salaries that drove much of the economy's growth would be impossible. Greece is now entering its fifth year of recession, and it would be years - Exclusive Analysis predicts three - before it got back to growth. This would be one of the longest recessions experienced by any country in modern history.
In the meantime, the country would nearly inevitably experience a series of short-lived governments, the politics would be fractious and ineffective and civil unrest would be likely. Wages would be massively depressed. Provision of social services would be weakened further, and living standards would drop. Exclusive Analysis even goes as far as to predict frequent water shortages and power cuts as infrastructure deteriorates and import prices become unsustainable. The few internationally successful domestic companies might be nationalised; most companies would default on their debts and be unable to raise working capital or money to invest.
Some analysts have suggested that trade could benefit from the devaluation of the currency versus the euro. This, according to UBS economist Paul Donovan, "has to be one of the more fatuous arguments made for bringing down the euro."
"In the event of secession or break-up, trade will collapse," Donovan wrote in a paper released on Monday.
Donovan's "conservative" estimates for the economic costs to a weaker eurozone country of an exit would be 45-50% of its gross domestic product (GDP).
The political and social ramifications, Donovan wrote, could be severe.
"The evidence of history is not promising in this regard. While strong components of a fracturing monetary union have generally been able to maintain social order, weaker countries exiting a monetary union have tended to move to more authoritarian forms of government, or emphasised the authority of an existing authoritarian government, or on occasion moved towards civil war. Even the United States came close to martial law in 1933, and state militia were used to contain scenes of civil disorder on a number of occasions," he said.
Donovan emphasised that these predictions were not made blithely. "We would suggest that civilian democracy is unlikely to endure in the wake of a weak country leaving the Euro – at least the democratic status quo is unlikely to endure."
Nationalisations, asset appropriation - even coups - are features of an institutionally weak country exiting a monetary union and overseeing the collapse of its economy.
And that is just the beginning.
To expect that the crisis would be contained is wishful thinking. Bank runs could be the likely vector of contagion, as the breaking of the 'taboo' of euro entry introduces a real and present risk of further exits. Depositors in Ireland, Portugal, Spain and Italy would suddenly realise that their cash was at risk of rapid and massive devaluation and take the rational step of removing it from the bank.
Ahead of this event, the banks themselves would be forced to cut their lending in order to have the cash available - deleveraging - but it is highly unlikely that they would be able to raise enough capital to meet the demand from customers. The losses on any Greek sovereign bonds held by those banks would be crystallised, further battering their balance sheets. Governments unable to bail out their banks would have to consider following Greece towards the exit door.
Countries which survive would probably have to take on more debt, throwing their economic plans off course. The deleveraging and drying up of the money supply would, just like the liquidity crunch that followed the collapse of Lehman Brothers, lead to companies and consumers losing access to credit and drive a deeper recession than is already being forecast on the base case that the currency stays together.
Just as the effects of Lehman Brothers' bankruptcy was not confined to the US, the defaults, euro exits and bank failures in Europe would have tentacles that would reach worldwide, dampening demand for Asian manufactured goods, African and Australian minerals, as well as probably prompting a collapse in stock markets and a credit crunch affecting US and other global banks.
A report from ING, the Dutch bank, forecast that the UK, which has a supporting role in Friday's drama, would be severely battered by a euro break-up. The pound, a relative safe haven, would see huge inflows and would likely appreciate as much as 25% against the euro. With nearly half of all of UK's exports going to the eurozone, against 33% of its imports. The loss of competitiveness could cut the country's exports by 10%, causing a surge in unemployment and a recession. If the break-up was more severe, and more than just one or two peripheral countries were to leave, the ramifications would be far more serious.
After the last EU crisis summit in late October, in which an 11th hour - actually 4am - deal was hammered out by leaders, Greece's then-prime minister, George Papandreou, threw the entire process into chaos by saying that the Greek people would be given the chance to decide on whether to accept the package by referendum. That decision cost Papandreou his job and the EU weeks of negotiations, ultimately driving the crisis up a notch to an exceptionally dangerous phase.
What that decision reminded politicians and investors was that individual countries and their people still have agency in this crisis. While they have no referendum - and little desire to leave the euro at the moment, according to polls - Greeks can still vote with their feet and their wallets
"At any moment they could get a rush for the exit," Stern said. "There could be a queue forming outside all of those banks."Suggest a correction