UBS Outlines Grexit Scenarios

Greece and its creditors have been locked in negotiations over the nation's bailout funding for months, but both sides are adamant that a Greek exit from the eurozone is not an option.

Still, cautious investors are worried that the two sides won't reach an agreement before Athens' next loan repayments are due, something that would cause a default and make a Grexit more likely.

In order to give traders a better picture of what may happen at the end of the Greek drama, UBS AG (OTC: OUBSF) took a look at possible Grexit scenarios and outlined their outcomes.

Recapitalizing Banks

The bank saw two scenarios in which Greece would have to leave the currency union.

In one case, Greek banks would be unable to keep up with increasing deposit withdrawals, which would in turn make the region's banks ineligible for funding through the eurozone's Emergency Liquidity Assistance facility. This would probably force the government to recapitalize the nation's banks, which would create a new currency.

Slow Exit

Another scenario outlined by UBS would lead to a slower exit. First, Athens would have to issue IOUs instead of euros for upcoming payments.

Eventually, the government would issue the payment promises for everything from supplies to public sector salaries. The more IOUs issued, the more the nation's economy would begin to rely on them as a form of payment.

In this case, UBS strategists pointed out that Greece could technically remain a part of the euro, but its financial system would be functioning as if it had left.

Grexit Still Unlikely

While these Grexit scenarios are possible, UBS underscored that the most likely outcome is that Athens receives its next installment of bailout funding from the EU.

While talks appear to be deadlocked, all sides agree that allowing Greece to default and leave the euro wouldn't be beneficial for anyone.

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