Euros, Drachmas and Bitcoin? Greece's Currency Options

European leaders have given Greece until the weekend to come up with a plan that satisfies them and avoids bank failure and economic collapse. But as the odds of a Greek exit from the European Union grow, we've outlined several currencies that Greece could choose in this scenario.

Continue using the Euro

Greece could unilaterally "adopt" the euro, even if it leaves the eurozone. If it chooses this, Greece will join Monaco, Andorra, San Marino and the Vatican, which are not eurozone members but use the euro as their national currency.

The European Commission allows these countries to issue a limited number of euro coins, but they are not allowed to issue their own banknotes. Only the European Central Bank can authorize the issuance of euro banknotes.

Jane Foley, senior currency strategist at Rabobank, said Greece is likely to be required to pay the money it owes to the European Central Bank in order to qualify. Whether the Greek banking industry can get assistance depends on the mood of the European Central Bank.

Developing a parallel currency

If the ECB stops providing emergency liquidity support to Greek banks, it could create another currency without abandoning the euro to meet commitments such as welfare payments. The new currency would likely fall sharply against the euro, which could have a serious impact on Greeks' ability to pay.

Foley explained that inflation in Greece would give Greeks an incentive to continue using the euro, thus establishing a dual currency. This would likely create a two-speed economy, with the euro dominating industries like tourism.

Roger Bootle, executive director of Capital Economics, told CNBC that adopting a parallel currency, rather than replacing the euro, would be a way for Greece to show Europe that it is not leaving the eurozone. This could make it easier for the country to continue to receive financial assistance.

Re-use of the old drachma

Another option is for Greece to return to its pre-2001 currency, the drachma. "The key thing is that Greece needs to convert its deposits and debts into the new currency ... and that's easy. The hard thing is the supply of paper money - they won't have any paper money at first."

To deal with this "chaotic situation," the Greek government may also need to issue IOUs, such as stamps, which can be printed quickly and in large quantities to replace paper money.

Foley believes that the introduction of any new currency, whether called the drachma or not, will lead to further defaults. Greece has already defaulted on a 1.5 billion euro debt to the IMF , one of its largest creditors.

The new currency will certainly be worth less than the euro, which will increase the country's burden of euro-denominated debt.

"Greece needs to be able to issue their own currency and need to devalue it," Bootle said. Such a transition would not be easy, but he insisted it was the country's best option.

Pegged to other currencies

Many countries peg their currencies to the euro to manage their currencies, but using a pegged currency requires either a stable economy to avoid speculative attacks or sufficient foreign exchange reserves .

Bulgaria has enough foreign exchange reserves to introduce a so-called currency board. This means that the board is committed to converting the local currency, the lev, into euros as needed. But Greece is unlikely to raise enough currency reserves to use this option.

Denmark, on the other hand, has its currency pegged to the euro, but the country has a stable economy and doesn't need to build up huge currency reserves to maintain that peg.

Electronic Money

Some have suggested that Greece adopt an electronic currency such as Bitcoin to avoid the practical confusion that would come with using a new currency or IOUs.

Garrick Hileman, an economic historian at the London School of Economics, said that it is extremely unlikely that the Greek government will officially adopt Bitcoin as its official currency, but once it is used, it will greatly increase the risk of Greece's exit from the EU.

“It is understandable that Greece might lack confidence in the new drachma and seek an alternative currency,” he said.

Both Bootle and Foley expressed doubts that an economy so heavily reliant on cash could function well without physical banknotes. “Greece is more likely to go completely cash than using electronic money,” Foley said.

She added that while electronic trading still takes place in Greece, “if you are a small manufacturer, you prefer to see cash given the uncertainty.”