A Greek exit from the eurozone as the insolvent country seeks a way from its debt nightmare is the least painful outcome for the country and the currency bloc, the chief economist at Invesco Ltd has said.

There are three broad outcomes for the eurozone crisis, argued John Greenwood in an economic note: unilateral Greek default and exit from the euro; acceptance of financial institutions’ austerity programmes; and rapid shift to European fiscal union.

“By far the best, and ultimately least costly, strategy would be for the country to exit the euro unilaterally, Outcome One. This will almost certainly imply defaulting on its external obligations, but the enormous advantage of being able to resume growth and reasonably full employment within a year or two (as Argentina did after abandoning convertibility in 2001) far outweighs the costly and dismal prospect of either of the other alternatives,” Greenwood said.

The issue of whether Greece stays in the eurozone or defaults has become important for wealth managers, particularly those businesses that are part of European banks which have exposure to debt issued by Greece and other "PIIGS" nations (Portugal, Italy, Ireland, Greece and Spain). For example, BNP Paribas, which is one of the largest wealth managers in the eurozone by assets, yesterday issued a note reiterating that its financial condition and funding arrangements were robust. 

“Outcome Two implies life in the eurozone as an independent, but bankrupt, recession-bound sovereign state under the prolonged direction of external paymasters, a formula for insurmountable debt fatigue that is ultimately unviable. Outcome Three is politically complex, implies no imminent relief but huge interim costs to and frictions within the eurozone as a whole as it creeps painfully towards full fiscal union,” Greenwood said.

In the case of a Greek euro exit, he said: “the Greeks take matters into their own hands and default on their sovereign debt, unilaterally exiting from the euro (and possibly the EU). They would announce the issuance of a new currency with immediate effect.”

“Like Slovakia when it split from the Czech Republic in 1993, the [Greek] authorities could decree on a Friday evening that all domestic deposits, loans and other contracts currently denominated in euros would be converted to new drachmas, effective from the Monday morning. The authorities would use the week-end to call in all euro banknotes currently circulating in Greece and stamp them with the symbols of the new drachma,” Greenwood explained.

“At the same time, to prevent a massive flight of funds, the authorities would need to impose a control on all withdrawals of deposits, perhaps limiting them to 100 units per person per day. Alternative arrangements would need to be made for businesses. In a matter of weeks Greece would be operating successfully under the new arrangements, and the economy would have escaped from under the intolerable yoke of prolonged austerity. The controls could then be lifted,” he said.

As Greece is a sovereign nation, the country can do what it wishes in its own borders even though the actions described have no provision in the Lisbon Treaty or its predecessors, Greenwood said. “Of course such action may violate external treaties, but the point is that the current set of circumstances is intolerable, and a quick exit, though embarrassing, would serve the interests of the Greek people far better than prolonged servitude,” he said.