The operational challenge is often cited as the major reason why a Grexit should be avoided at all cost. My point is that the operational challenge of a Grexit would be absolutely manageable. Instead, it is the economic risk for Greece’s future which should matter above all.
I only concern myself here with the operational challenge of a possible Grexit and I will address the key issues. We are at point A where Greece’s currency is the Euro and when we reach point B, Greece will have the Drachma as a perfectly well-functioning local currency. The critical period is the transition from point A to point B.
Contrary to general assumptions, Greece does NOT have to physically create the Drachma as a new currency immediately. That would be like putting the cart before the horse. Instead, Greece simply has to rename the Euro into Drachma within the national jurisdiction of Greece and create the “real” Euro as a new currency.
For the purpose of simplification, let’s call the “real” Euro the “Free-Euro” and the provisional new local currency (until the Drachma is fully in place) as the “Drachma-Euro”. Also, let’s assume that the Drachma-Euro would trade against the Free-Euro in a relation of 2:1. That is one Free-Euro buys two Drachma-Euros.
Domestic sphere versus cross-border sphere
This is the critical differentiation which needs to be made. The domestic sphere includes everything that takes place within the national jurisdiction of Greece. The cross-border sphere includes everything else.
A simple law would stipulate that, effective immediately, all non-cash items within Greece’s jurisdiction are renamed from Free-Euro (that is the Euro as in the common currency) into Drachma-Euro at a relationship of 1:1. Examples of non-cash items: assets/liabilities of banks, public institutions, corporations as well as their incomes/expenses, etc. to the extent that they are booked within the national jurisdiction of Greece. With one stroke of a pen, there would no longer be the Euro (Euro as in the common currency) in Greek bookkeeping accounts. No new accounts would have to be opened. Instead, existing accounts would simply be renamed.
As a result, all non-cash transactions could be handled as before except that they are now in Drachma-Euros which have a value of 2:1 against the Free-Euro. The Bank of Greece would have unlimited capacity to create Drachma-Euro liquidity.
The real challenge would be the cash items. The general view is that Greece would have to arrange, top secretly, that new Drachma cash is printed/coined/distributed. Far from it! One would simply say that all existing Euro-cash in circulation will, effective immediately, be considered as Drachma-Euros within the national jurisdiction of Greece. To evidence that, all existing Euro-cash would be stamped as “Drachma-Euro” when it comes into circulation. The stamping would be done by the recipients of Euro-cash. Mind you: the stamping would only serve to get people accustomed that their Euro-cash is no longer worth 1:1 against the Free-Euro. Even if a Euro-banknote is not stamped, it would still only be worth 2:1 against the Free-Euro within the national jurisdiction of Greece.
How about those who use Euros from abroad (i. e. tourists) in Greece? Will their Free-Euros only be worth Drachma-Euros? Not at all. Those people would do what they did before the arrival of ATMs: go to a bank and show evidence that they have “imported” their Euros from abroad and they could exchange those Free-Euros at 1:2 into stamped Drachma-Euros (see capital controls below).
The specific charme of this is that those who have hoarded Euro-cash under matrasses suddenly discover that, effective immediately, their Euro-cash is worth only 2:1 against the Free-Euro as long as it is used within Greece. If they want to get a real Euro’s worth out of it, they would have to use it outside of Greece (see capital controls below). That would put all Greeks on equal footing, i. e. those who have hoarded Euro-cash would not be better off than those who left it in their bank accounts.
What would happen at ATMs? Very simple. The customer would withdraw, say, 100 Euros from the ATM and he would know that those are now Drachma-Euros, i. e. worth only 2:1against the Free-Euros. The logistics of adapting ATMs to the Drachma could be handled during the time, say 6-12 months, until the new Drachma has been designed/printed/circulated.
No new Drachma-currency would have to be designed/printed in a hurry. It would suffice to over-print the regular Euros with a simple stamp “Drachma-Euro” on them. Again, the stamping would only serve to get people used to the fact that their Euro-banknotes are no longer worth the same as a Free-Euro. In reality, that would be the case from day 1.
Transfers out of the country must be approved by the Bank of Greece. No restrictions as regards commercial payments. Restrictions on everything else.
Transfers into the country must be controlled as to the the sources of funds. No special controls as regards commercial receipts. Very strong controls as regards everything else. Transfers from an anonymous offshore company can only be accepted by a bank if the beneficial owner of that offshore company is revealed. Loans from an offshore bank can only be approved if the Greek borrower authorizes his lending bank in, say, Switzerland to reveal all collateral they have behind the loan.
Strict controls on the export and import of cash.
A temporary deposit freeze will be necessary during the transition period.
A long weekend may not be enough time to get all the necessary legislation passed. Thus, a bank holiday must be announced but under no circumstances should that last longer than one week.
That is where the economic risk lies. If the economy is not to come to a standstill, Greece will have to have pre-arranged a liquidity supply for imports.
The foreign debt is almost a non-issue. If the 350 BEUR before the Grexit were not sustainable, they will now be worth 700 BEUR and will be so much less sustainable. That is simply a question of negotiations as to how much of that debt will have to be forgiven.