With the probability remaining quite high that Greece could leave - or be kicked out - of the eurozone, research and consultancy firm Exclusive Analysis looks at how the country could revert to its former national currency.

Editor’s note: Here is more insight from the research and consultancy firm Exclusive Analysis on the issue of the eurozone debt crisis and whether Greece will leave the currency zone and revert to its old drachma currency. As ever, the opinions expressed here are those of the authors and not necessarily shared by this publication.

Key judgement

A probable Greek default is likely to trigger a systemic bank run in Greece, which could in turn cause the government to abandon the euro. The consequences of such a scenario are potentially so severe and the likelihood high enough for businesses to understand how this can affect them. The business risks include exchange transfer, non-payment, contract frustration and civil unrest risks.

Executive summary

A systemic bank run is a likely trigger for Greece's exit from the euro.

To save the banking system the government would have to freeze banking operations, introduce a ban on all international transactions, make the drachma new legal tender and convert all bank deposits into drachma at an arbitrary exchange rate (e.g. 1:1 euro).

The government would probably redenominate debts issued under Greek law into drachma and stop servicing other debts.

New drachma notes would probably be transferred to banks in exchange for their euros. The government would appropriate these euros to boost its foreign exchange reserves, using some for vital imports (e.g. food and fuel).

A number of Greek companies would be unable to pay their foreign financial obligations as foreign payments are initially suspended. Corporate defaults would also be likely as bank deposits get converted into a fast depreciating drachma but corporate debts remain in euros and other foreign currencies.

Greek airlines would probably stop flying internationally given a lack of fuel and worries about aircraft seizure. Industrial unrest at ports would likely be considerable.

Tourism, agriculture and processed food production would benefit from sharp currency devaluation, producing the green shoots of an economic recovery in subsequent years.

Detailed analysis

Exit trigger

A suspension of EU bailout funds, the collapse of the technocratic government or another shock causes Greek depositors to hasten withdrawal of their euros from banks, fearing that their deposits will be frozen and re-denominated. This rush quickly develops into a systemic run on the banks that the government is powerless to stop. (The rate at which depositors withdrew their funds accelerated to around 1 per cent in September, at which point the data stopped being published.) Government response: reintroduction of the drachma

First week

The government declares a bank holiday and a complete freeze on capital transfers abroad. Companies cannot pay foreign suppliers and creditors.

The technocratic government resigns and a new government of national unity is formed in Parliament with left wing politicians playing a larger role.

The drachma is declared the new legal tender. Deposits are converted at a given official exchange rate (probably 1:1 with the euro). Civil servants, taxes and utilities will expect to be paid in the new currency.

The government converts all debt under Greek law into drachmas. This includes a share of the debt the government and companies owe to foreign creditors. The remaining foreign debt that has been contracted under non-Greek law remains in euros but service payments are suspended.

Second week

The government suspends the bank holiday and allows depositors to make payments within Greece on their bank cards. Companies can pay suppliers and employees on their bank cards or online, but foreign payments remain suspended across the board.

Depositors can withdraw euros but only up to a fairly small amount (e.g. less than €170, Greeks' weekly minimum wage). Most of this is used to make everyday payments rather than hoarded at home. These regulations will remain in place for several months.

Fourth week

As new drachma notes start being printed, the government swaps these with the euro notes the banks hold. These are then deposited in Greece's foreign exchange reserves. The swap is carried out at an official government-determined exchange rate (possibly 1:1).

Depositors start withdrawing drachmas from their bank accounts. As the new legal tender, drachmas are used to pay taxes and utilities, and retailers are forced by law to accept them.

Commercial implications in the three-year outlook

A black market for euros emerges; private sector contracts are redenominated.

These monetary arrangements prevent the complete collapse of economic activity. A black market is quickly set up for euros and the drachma depreciates against it sharply. Both euros and drachmas circulate, but progressively more payments are carried out in the latter. That is because households and companies hold as many euros as possible and use drachmas as the means of exchange. (In high inflation Latin American economies in the 1980s people kept dollars at home and rushed to get rid of national currency as soon as they were paid.)

All contracts in the private sector (the supply of goods and services, pensions, mortgages etc) are officially re-denominated in drachmas. However, most prices are informally set in euros and converted back to drachmas at the black market exchange rate of the day. The government deliberately controls a few key contracts in order to distort prices in a way that improves fiscal accounts: e.g. utility prices, civil servants' wages and pensions remain constant or increase below inflation, so that government expenditure decreases in real terms.

Trade finance is suspended following the default, with transport and logistics operations severely disrupted.

The default causes a freeze in trade finance. Fuel shortages are a particular threat for energy intensive sectors such as transport and manufacturing. Some flights from Greece are likely to be suspended because of the lack of fuel. Greek airlines such as Aegean, Olympic and Athens will face high risk of being denied services in foreign airports. Aerolíneas Argentinas suspended international flights during the Argentinean default in 2002 because of this. The risk of civil unrest is also very high in ports as workers are temporarily laid off. Workers across the economy soon join in the strikes in protest against the real decline in their living standards.

To prevent the country freezing up, the government is likely to use some of its foreign exchange reserves to finance trade in priority goods (e.g. fuel and grains). It would very likely set up a multiple exchange rate system. Under this, it would sell euros at the appreciated exchange rate to importers of vital goods (energy and basic foodstuffs) and at the depreciated black market rate to those wanting to import other goods or to travel abroad.

The government is more likely to apply this multiple exchange system than tariffs, as the latter is banned under the European Union. Under this exchange rate system, policymakers would have wide discretion on trade and foreign exchange policies, increasing bribery and corruption risks considerably.

Inflation would spike sharply; debt default would ease pressure on the government budget.

Inflation would almost certainly increase sharply given the scarcity of goods across the board (imports are 26 per cent of GDP) and as the drachma depreciates. With much of the foreign debt defaulted on, lower servicing costs and stronger tax revenues (given high inflation and new tariffs) would probably lead to an improvement in the government's budgetary position.

Payments to civil servants, pensioners and suppliers would likely be capped at beneath inflation (as mentioned above). High inflation would also help to reduce the debt burden, as the government is likely to have converted part of its debt into drachmas in the first week of the crisis.

Civil unrest would probably ease initially

The fall of the technocrat government and measures such as defaulting on sovereign debt are in line with most of the protesters' demands. This suggests civil unrest would probably fall in the first month following withdrawal from the euro. However, protests would likely increase among those who have been relatively quiet so far (e.g. middle class deposit holders), though these would be less violent in nature. After the first month or two, when it became clear that wages were falling behind inflation protests, unrest would once again be likely to escalate. Industrial action would increase, particularly in sectors where unions are well organised, such as the power and transportation sectors and among port workers and civil servants.

The economy is likely to improve after three years

After a series of short-lived administrations, Greece has a relatively stable centre-left government. The protracted crisis has ensured a political consensus around strong fiscal fundamentals and the budgetary position is improving. The government has unified the exchange rate system at a depreciated level and is attempting to lift capital controls and arrange a settlement of its unpaid sovereign debt.

Greater fiscal stability has enabled the Central Bank to scale back its money creation and inflation has fallen to between 10 per cent and 20 per cent. Labour costs are significantly reduced with wages rising by less than the value of the currency depreciation. Agricultural exports, supported by cheaper labour and a depreciated exchange rate, start to grow strongly.

Greece begins to receive investment from foreign companies in sectors such as textiles and processed food, attracted by the proximity of the European market. Even though standards of living have drastically reduced, unemployment has started to fall. The government uses public investment projects to create jobs and to address the shortfall in Greece's infrastructure investment; there are frequent water and power cuts.

The depreciated drachma stimulates a tourism boom in the Greek islands and investment in the sector picks up given lower property prices. Friction increases between the islands and the central government about the allocation of tax revenues accruing from the tourism industry, with the former pushing for increased autonomy.