What happens if Greece has to quit the euro? The prospect of Grexit seems more realistic now than at any time since the worst days of the euro crisis — if not more realistic now. Bank of America Merrill Lynch's analysts held a roundtable on the potential impact of a Greek exit from the euro. Though it is not what they seem to be expecting, they say it is now time to "start thinking what used to be unthinkable." Here are some of the highlights. One of BAML's Europe Economists, Ruben Segura-Cayuela, had this to say (our emphasis): In a Grexit scenario, it is important to distinguish between the short and the long run. In the short run, with the country likely outside markets, sharp currency devaluation, a credit crunch, and a (forced) tighter fiscal stance, the Greek economy would suffer a GDP contraction of unprecedented magnitude, even by Greek standards. Just as an example, Argentina contracted 11% in the year after its default and devaluation. Moreover, inflation could increase to double digits. It seems universally agreed that Grexit would have a very severe immediate impact on Greece. People who think Greece should leave the euro often argue that in the long run, looser monetary policy and a cheaper currency would give Athens a boost. Segura-Cayuela doesn't agree: In the long run, a weaker currency will be positive for the economy only if Greece implements the reforms that the country has failed to implement in order to avoid exiting the Euro. High potential growth outside the Eurozone requires stable and predictable monetary policy, improved fiscal management, and structural reforms to improve the business environment and attract investment in export oriented sectors. However, the poor reform record of successive Greek governments would tend to suggest that such reforms are more likely to happen under the pressure of European institutions, within the euro. And according to BAML's Athanasios Vamvakidis, the bank's chief G10 FX strategist in Europe, based on the example of Argentina's devaluation and the typical similar emerging market crisis, the new Greek currency could be devalued by 50% after a Grexit. In a typical devaluation, each of the old currency units (the euro, in this case) is replaced by one of the new ones (the drachma, or whatever Greece decided to call it). The value of the new unit would then plunge — making imports dramatically more expensive. Vamvakidis is not alone — Nobel Prize-winning economist Christopher Pissarides said Wednesday that Grexit "would mean the biggest haircut of wages ever, because most products that we consume in Greece are imported, and their prices will be in euros." That's according to the Greek newspaper Proto Thema. And like the economy in general, Vamvakidis doesn't think Greece would be able to bounce back quickly: The legal basis for the euro is the European Treaty, which supersedes national law. Greece would expose itself to years of potentially crippling litigation, with holders of claims in euros refusing to be repaid in any new Greek currency. Moreover, Greek people are likely to continue using the Euro in their daily transactions (after all, they have already withdrawn €100bn from the peak since the beginning of the crisis). Some of the latest polling in Greece is starting to look much more grim for the government: The number of people who say they are concerned about the way things are going has surged from 22% in February to 50% now — and the proportion of people who want to stay in the euro "at all costs" is above 75%.Join the conversation about this story » NOW WATCH: 'Game of Thrones': The Iron Throne is a terrible investment
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