'Grexit' would be no easy ride for austerity-weary Greeks

"Grexit" would be sudden, sharp and probably conducted in the dark of night; if Greece were to quit the euro, it would also mark the beginning of a long, hard road - for some harder still than the one already traveled. The new leftist government wants to keep the country in the currency union, as do its euro zone counterparts. But if they fail to agree a deal to replace or extend a bailout program that expires on Feb. 28, Greece faces the risk of a euro exit - "Grexit" in market shorthand - forced by bankruptcy and default.

Such a scenario would demand a rapid official response as remaining public confidence in the Greek economy evaporates. Capital controls would have to be imposed to stop an uncontrolled flight of cash abroad. They would come when banks and financial markets were closed. Then the country would need a new currency, one that history suggests may initially be so weak that already cash-strapped Greeks and local businesses would lose much of their savings. This would be accompanied by a huge jump in inflation. For a while, at least, Grexit may bring worse pain to the Greeks than the austerity policies imposed by the European Union and IMF, under which one in four workers is out of a job.

A devaluation would make some sectors more competitive; Greek holidays, for instance, would be cheaper for foreign tourists, but life outside the euro could still be tougher. "The Greek economy was destroyed by the decision to anchor it to the euro.... It was a political decision but now it is not easy to leave, to recreate something new," said Francois Savary, chief strategist Reyl Asset Management. "Do you think the 25 percent of Greeks in unemployment can find jobs in tourism? Do you think the unemployment rate will even remain at 25 percent (after Grexit)?" Economists say leaving the euro would throw Greece into another deep recession, with a sharp drop in living standards and an even more severe fall in investment than now.

There is no precedent for Grexit, although Iceland, Cyprus and Argentina suggest what might happen.Iceland has its own currency but imposed controls against capital flight in 2008 after the collapse of its overblown banking sector. Euro zone member Cyprus closed its banks for two weeks and also introduced capital controls during a 2013 crisis. Both countries still have some restrictions in place. Neither was planning on changing its currency, as Grexit would imply. For that, Argentina may offer some hints: after earlier defaulting, it ditched in 2002 a currency board system under which it pegged the peso to the dollar. The peso fell 70 percent in the next six months, while the percentage of people under the poverty line more than doubled.

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