On the second day of 2012, Greece's government die-cast 1 million gold-and-silver plated €2 coins, joining the 16 other euro zone member countries in minting a coin meant to celebrate the tenth anniversary of the the euro. Now, less than six months later, that same government may well stop accepting those coins as legal tender.
Moving rapidly from the realm of tin foil-hat conspiracy to a hushed taboo topic in global diplomatic circles to a bullet point being openly talked about as a fait accompli, Greece's exit from the European common currency union is not unthinkable anymore.
Christened the Grexit, such an event is now seen as a very possible outcome after three years of bailouts, sovereign defaults, austerity agreements and diplomatic maneuvering.
Last Friday, after months of denials, the European Union said it was working with the European Central Bank on contingency plans should Greece abandon the euro. Similar emergency discussions were under way in countries as far away from Europe as Australia and Japan.
Most analysts believe the precipitating event would be a declaration from the Greek government that it intended to default on foreign bond obligations or abandon austerity conditions imposed as part of international bailouts.
But while consensus is clear about what could lead to the Grexit, what would follow is less certain. Here are five possible options:
Option A: The 'Geuro' is born
The idea of having the Greek government issue a local currency parallel to the euro, while at the same time maintaining the euro as legal tender for everyday transactions, was suggested as a possibility Monday by the chief economist of Frankfurt-based Deutsche Bank, who dubbed the new unit of value the “Geuro.”
The basic idea involves Athens issuing the Geuro as promissory notes on future euro payments, which is akin to Greece writing billions in euro-denominated checks to pay its bills but postdating them to “sometime in the future.” Such checks would be exchanged at a huge discount from their nominal euro value.
The parallel currency idea is somewhat seductive for the flexibility it could offer. Unlike mandating that a new currency be used in the country for all legal transactions, Greece could segregate the activities it decrees must be paid for with Geuros, making it, in some cases, a fiat currency. In this scenario, Greece could pay public employees in the fiat currency and demand citizens use it to pay a portion of taxes owed.
Theoretically, the Geuro could prevent a full default on Greece’s part, as it could use the new notes to pay current sovereign bondholders. And because such a Geuro would stand for future payments, unlike most world currencies with no inherent value, it could be more stable and worth slightly more than would, say, a return to the drachma (the pre-euro Greek currency).
But such a monetary arrangement could also have pitfalls. Introducing the Geuro could give the impression that Greece’s debt problem is being kicked down the road once more. And although it would be presented as a way to make good on international obligations, the new future-linked currency could likely enrage the Greek populace, which has turned sharply against honoring those agreements.
Option B: Dollarization
As a dark horse alternative, Greece's leaders could choose to dollarize their economy, abandoning the euro in favor of greenbacks as the country’s legal tender.
Such a move would likely occur only after a full default -- Greece won’t be using dollars to pay international creditors -- and it would not prevent government insolvency or financial chaos in the country. It also has the sense of ditching a “devil you know” for one they would have little control over: In this scenario, Greece would adopt U.S. dollars, but it would be unable to print them or otherwise affect the direction of the monetary policy underlying them.
But dollarization, which would have Greece join Zimbabwe, Panama and Ecuador in adopting America's money as the national coin, would have one huge advantage over other outcomes: stability.
The time needed for the international financial system to assess the value of Greek goods and services in U.S. dollars would be much shorter than, for example, figuring out the proper pricing of the drachma.
Option C: Bring the drachma back
Abandoning the euro as their legal tender, Greek leaders would have about 46 hours to navigate the uncharted legal and financial challenges that reintroducing a sovereign coin would entail, according to a recent analysis by Bloomberg News, suggesting that international governments would push Greece to act during a weekend, when world equity and credit markets are closed.
Given that printing enough money to replace a national currency is a Herculean task that would take weeks or months to complete, the first “new drachmas” adopted might just be euro notes the government has forced banks to stamp with an indelible ink “?” mark.
If history is any guide, the initial exchange rate would make each drachma worth about a third of a euro cent. But the currency would begin to devalue almost the second it was declared, on the expectation that, when the government does finally print new money, it will create billions in excess of the current monetary supply. Short-term economic chaos is a near-certainty.
To avoid global financial collapse, it is generally believed that if Greece reintroduces the drachma, Germany and other stronger European economies would throw everything they have at saving the euro, authorizing bank and sovereign bailouts to prop up weaker nations.
In Greece itself, all bets would be off: Civil unrest and localized political violence, temporary autarky (national economic self-sufficiency and independence), and a period of stagnation and mass emigration are some of the dire possible outcomes being discussed. A relatively quick bounceback once Greek society adjusts to the inherent downgrade in its standard of living –- a recovery to be measured in years and not decades –- is among the most positive predictions.
Option D: Show PIIGS the door
A Grexit could be a prelude to other quick departures from the euro zone. This possibility is based on the belief that the default on sovereign debt, which would precipitate Greece's euro exit, would send investors panicking, no longer able to believe that bonds issued by other euro zone states have the full faith and credit of the common currency union. In this scenario, investors would dump Spanish and Italian assets, which in turn would force those countries into a cycle of international bailouts, further austerity, and public resentment, all leading up to eventual calls from within Spain and Italy for monetary independence ... and the collapse of the euro as we know it. Some, including various non-European governments, believe that while that storyline is credible, the euro may survive after aggressive intervention from Germany and France, perhaps backed by Austria, the Netherlands, the International Monetary Fund, the United States and China.
Others believe Germany and France will not have the will or the political support at home to bail out additional fallen neighbors. If that is the case, the world might see the reintroduction of several left-for-dead currencies by the end of the year, including the Spanish peseta, Italian lira, the Portuguese escudo and the Irish pound.
Such a result would create jobs for computer programmers (the currency sign for the portuguese escudo, a stylized S traversed by two bars, was so rarely used on computer systems prior to the abandonment of the currency that it is missing from many digital financial programs). The rest of the world, though, could fall back into recession. In a term that is yet to catch on, Nobel Prize-winning economist Paul Krugman termed this outcome the Eurodämmerung, in reference to Twighlight of the Gods, Richard Wagner's opera that ends in Götterdämmerung, the destruction of the known universe.
Option E: 'Eurogeddon'
The most extreme outcome envisons serious violence in the streets of Athens and other European capitals following a Greek exit from the euro, a Eurogeddon scenario that is envisioned as a likely possibility even by leading economists at major international banks.
At the forefront of this group are Stephanie Deo and Larry Hatheway, both at giant investment bank UBS, who have consistently modeled potential catastrophic aftershocks if Greece shelves the euro. Hatheway describes the world after this breakup as a place where currencies and assets may no longer be valued at logical levels -- where canned foodstuffs are used as money and economic promises are backed only by the full faith and credit of the issuer's AK-47s.
To the question I sometimes get about what is the 'right' asset allocation in the event of [a Greek/euro] breakup, Hatheway wrote in a December note, I suppose there might be some assets worthy of consideration: precious metals, for example. But other metals would make wise investments, too. Among them tinned goods and small-caliber weapons. And bullets.