If Greece exits Euro, there's going to be a lot of capital flight: Rob Cornell, Chief Economist, Dutch Bank ING

It is mere matter of speculation at the moment whether Greece will exit the euro. But if it does, it could blow out into a crisis worse than the one the global economy faced after Lehman collapse, says Rob Cornell, chief economist at Dutch bank ING. Edited excerpts of an interview to Gayatri Nayak of ET.

Will Greece exit euro?

Greece either will or won't exit the euro, which is a binary outcome. We can argue about a subjective probability of whether it will or won't. It's very close (call). The bigger question is what happens after that.

What happens if it does?

That's why I am concerned. The Eurozone leaders are meeting on their regular calendar. They are not having daily emergency meeting to sort out what needs to be done. They haven't realised how serious and critical it is getting.

What happens if euro is going to leave out of Greece. It's absolute catastrophe. The practical difficulties of introducing a new currency would be immense.

The new currency, we think, would depreciate something like 80% within the first 6-12 months. That's the worse end of other currency regime collapses we've seen in the world. That means, in an international sense, the Greek economy would get cut to a fifth of its size and cut its purchasing power.

What would be the fallout of such a development?

If you were to do business with a Greek company in euro, you are not going to do business with those companies. You are not willing to take those risks. You don't know what you are going to be paid in and you probably can't hedge against it. Within the Eurozone, it becomes very awkward.

There are a lot of trade disruptions. You have contagion as well. There's going to be a lot of capital flight, runs on banks, liquidity is going to be a really big issue. It so happened when the Lehman collapsed. We would expect something similar.

What does it mean for the rest of the world?

For the rest of the world, you are looking at an extremely risk-averse scenario. You will have capital flows out of the non-G10 countries back to the core hubs of London, Frankfurt, New York.

A currency depreciation for emerging market currencies will be a really bad scenario. It will be absence of capital for economies which have been dependent on imported capital. In the mean time, very weak (stock) markets.

What does this mean to emerging economies, including India?

They had appreciated in 2009/10. There is no reason why they should depreciate. We have forecast massive depreciation. We have some currencies that have room for depreciation.

There are some countries within the non G-10 currencies that will encourage their currency's depreciation. Brazil is one of those. I don't think India will. RBI will continue to monitor the levels. They will need introduction of short-term measures on capital flows.