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Talk about Greece leaving the Euro has been reignited by the recent election of Syrzia, with some again talking about how it is practically inevitable.

Why are these people viewing a Greek default as likely triggering an exit from the Euro? Couldn't Greece simply default on its debt and continue to use the Euro? Would this trigger the ECB to freeze the accounts of Greek banks (and if so, why?).

I understand why moving to a local currency, which can be devalued, might make sense for a country that needs economic stimulation. But I don't understand the direct cause-and-effect from a sovereign default to an exit from the Euro.

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What exactly do you mean here when you say by "leaving the Euro"? Unable to use the Euro in domestic transactions? The European Central Bank forbidding the use Greek government debt as collateral for loans? There are lots of different issues here. There are also many countries that "use" the Euro without being "in" the Euro, either using it directly like the Vatican or pegged like Denmark . – BKay Jun 30 at 18:37

2 Answers 2

Until the euro remains the official currency, the public and private sector in Greece have to pay wages and invoices in euro. They're also paying external debt in euros. But euros are fleeing the country and the banking system. And Greece can't print more of them. It means that firms and people have less and less liquidity.

To escape the barter economy, Greece needs some sort of money that can circulate legally within the country. And this money needs to be printed without ECB's permission. So, this is the exit everyone discusses. Notice that no one, in fact, takes away the euros. Two currencies may coexist.

And what's the default everyone is talking about? Just a failure to keep up with the payment schedule, mostly to the IMF. It says nothing about how much of its public debt Greece will never pay. So, it depends on the negotiations whether the creditors will agree to stretch the payments or reduce the interest rate.

This default is not directly related to this exit. But both depend on how much euros the country gets from abroad. Until export is weak, the IMF/EU credit line remains an important source of euros. The failing negotiations regarding this line may cause both default (on public and private debts) and the exit.

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I think the key thing is that the ECB stops providing banks with euros, which means that they will not be able to create money or deal with bank runs. But what specifically will trigger the ECB to cut the banks off and why? – SkinnyJ Jun 30 at 19:21
@SkinnyJ According to… , the ECB stopped providing Greek banks with liquidity from "early February". – Anton Tarasenko Jul 3 at 11:50

As far as I recall, you're dead on: they don't have to. The contracts don't allow for "some countries kicking others out of the Euro Zone", they never envisioned this scenario when writing them.

On the other side, Greece can, and should, leave on its own. Sharing the currency is hurting them economically, the only reason they're not is that the continuous inflow of loans is preferred over leaving the zone. But if Greece really defaults, I don't think there will be any more lending in the short run. And then really there is no reason for Greece to stay.

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