by Calculated Risk on 5/13/2012 07:26:00 PM

The Financial Times has an overview of some things that might happen when Greece exits the euro: Eurozone: If Greece goes ...

In any exit scenario, the new drachma would depreciate rapidly. ... Goldman Sachs has estimated ... a devaluation of 30 per cent is needed compared with the rest of the eurozone, and more than 50 per cent with Germany.
...
Even if all interest payments were stopped [Greece defaults again], additional austerity would still be needed for a period because Greece’s tax revenues still fall short of its public spending – a primary deficit.
excerpt with permission

The price for imports would soar (like oil prices), and living standards would fall - and Greece would have to immediately bring their primary budget into balance. The hope would be that competitiveness would be restored, and the economy could start growing again.

A key question is spillover to other countries.

Professor Krugman has some thoughts on timing: Eurodämmerung

Some of us have been talking it over, and here’s what we think the end game looks like:

1. Greek euro exit, very possibly next month.

2. Huge withdrawals from Spanish and Italian banks, as depositors try to move their money to Germany.

3a. Maybe, just possibly, de facto controls, with banks forbidden to transfer deposits out of country and limits on cash withdrawals.

3b. Alternatively, or maybe in tandem, huge draws on ECB credit to keep the banks from collapsing.

4a. Germany has a choice. Accept huge indirect public claims on Italy and Spain, plus a drastic revision of strategy — basically, to give Spain in particular any hope you need both guarantees on its debt to hold borrowing costs down and a higher eurozone inflation target to make relative price adjustment possible; or:

4b. End of the euro.

And we’re talking about months, not years, for this to play out.

Yesterday:
• Summary for Week Ending May 11th
• Schedule for Week of May 13th