So Greece will still be unable to pay down its existing debt or to borrow more money.
The typical long term solution is to devalue the currency. Imports become more expensive. Consumers suffer an immediate hit on their standard of living. Usually you would expect a steep decline in the units of imported goods especially any discretionary consumer goods. On the other hand exports become cheaper. For Greece, olive oil, wine, cheese become cheaper in the world markets which can increase demand and help grow all export industries. Tourism is an a sense a service industry export and for Greece a significant one. Presumably services purchased as part of the tourism industtry - hotels, restaurants, events, guides, transportation become cheaper for the foreigner visitor. After devaluation Greece could become a very, very popular destination.
The problemis of course that Greece does not have its own currency.
So how does it get there.
All bank deposits need to be converted from Euros to drachmas. All goods and services are prices in drachmas. Day One - it is a one-to-one conversion. After one month - Euro currency is no longer accepted. After a few months the drachma is devalued so that one drachma equals 0.7 Euros. All bank deposits and all Drachma in currency now have lost 25% of their purchasing power. The Greek government is now able to issue new bonds in Drachma and have the central bank buy them - essentially printing money. Inflation would probably be in double digits but now the economy is growing again. Through economic growth, slow reduction in government spending and inflation Greece will be able to balance its budget and pay down its debt.
Greece will simply default on their existing Euro bonds.
This is the scenario worked out over time by many other countries. The savers and investors take a big hit. The bond holders take a hit. Consumers take a hit. Private borrowers may get a break.
The unique challenges for Greece is that bank deposits can be moved to other countries. Why would anyone leave their Euro deposits in a Greek bank and subject themselves to this devaluation. No one will. That's why when this is done it has to be done "overnight" even if "ovrrnight" means a one week bank holiday to allow the banks to fix their bank deposit accouting and payment systems.
The run on Greek banks has already started. With the massive withdrawals already undeway most Greek banks are insolvent. The government will likely need to nationalize the banks for some time.
