This is a hard question. If Greece borrowed money from me, I would want them to pay. But if I am Greek the situation looks different. Let me take a cold-blooded look at what will offer the best long-term economic outcome for Greece, laying aside all the moral arguments about paying one's debts, etc.
The simple arithmetic is that Greece cannot afford to pay its debts. They are getting ready to give debtors close to a 70% haircut, if you figure in the time cost of money. There is no way in Hades, to borrow a Greek term, that they can get back to 120% of debt-to-GDP by 2020, given the massive austerity they have agreed to and which is just the beginning. (Is 120% now the new sustainable level because that is where Italy and Belgium are?)
Forcing debtors to take such a loss is not going to entice future lenders. Greece is effectively shut out of the bond market for a very long time. Their only source of borrowed money is the EU, and that debt is now costing the future of the country for at least a generation.
Most Greeks who are able send their children abroad to study. Given that the unemployment rate for people under age 25 in Greece is nearly 50 percent, it appears few young people are returning from abroad. In September 2011, organizers of a government-sponsored program on emigration to Australia, a program that reportedly attracted only 42 people in 2010, were overwhelmed when more than 12,000 people signed up to attend. (Source: Stratfor)
What is the point of paying back part of the bonds if you don't get access to future bonds? The current program offers no hope, and the people of Greece know that.
Greece should declare an "emergency," along with a bank holiday, and leave the eurozone and return to the drachma. Keep as much hard currency and reserves as you can, so you can buy needed medical supplies and energy until things turn around.
Don't pay one dime of debt to anyone for at least a few months, if not years. Default on every penny. Let the market set a value on the future currency, and only then offer to give two drachmas of debt repayment for the value of one drachma in hard euros in new debt. If you get no euros, then give no drachmas. But be very frugal about making that offer. Run up as little debt as possible in the beginning.
Play the political game, of course. Maybe even promise participation in a better future, when that happens.
Meanwhile, get your budget house in order. Figure out how to eventually run small surpluses, which will be easier if you don't have to pay for that old debt. Fix future growth of government spending to some percentage of GDP growth. Amazingly, you will soon – in just a few years – be seen as a worthy credit and be allowed back into the bond market. Ask Iceland or even Argentina (if ever there was a country that should be shut out of the world bond market, it is Argentina. They have made a national sport of defaulting on debt. Go figure.)
Right now tourism is 15% of your GDP. Make it 25%. Divert resources to make it happen. Make your country the best vacation value in Europe. Get your people, who are naturally hospitable, to get behind the drive for more tourism. Greet each traveler like someone bringing you gold, because that is what they are doing. That hard currency is what will buy you the resources you need (like food, energy, and medicine).
Note: you are not leaving the European Union, just the euro. There are lots of members of the EU that have their own currencies. You will just be another such country.
But since there will be a black market in euros if you try to keep a closed currency, at some point not too long after converting everything in the banking and financial system to drachmas, just go ahead and let people use their euros. Let businesses post two prices, but all government transactions will be in drachmas. Your citizens and businesses must pay their taxes in drachmas. If they take euros, they will need to find the drachmas to pay the VAT or other taxes.
Don't let the central bank go crazy printing money. That will just cause inflation and drop the value of the drachma further, postponing a recovery.
If a business wants to open a factory, then make it happen. Encourage all the foreign direct investment you can. Give them a tax holiday. Look at Ireland and match their tax rates. No government red tape to open a business, just bring your money and jobs. If some of your citizens "magically" find some euros that were in offshore bank accounts and want to bring them back to invest, let them. Declare a tax holiday on all money that shows up. Let them bring their euros back for the market price of the drachma until things stabilize.
Drop your tax rates to the lowest in Europe and then enforce them. The lower you make them, the more money you will raise in taxes. Look at some of the old Warsaw Pact countries. Selectively sell your government-owned businesses to get the currency you need for infrastructure (roads and such) and to remove the annual losses they have from your books. Or simply give most (and in some cases all) of the assets to the employees and unions, for businesses like your railroads.
There are local contingencies and characteristics I am not close to being aware of, I am sure. But structure everything that you can for the future, which will arrive faster than you think. There is a huge Greek diaspora. If they see opportunity, they will invest, if not come back. Make sure they see it.
It will be tough for the first year or two. But then you can grow your way out of the crisis, at first slowly and then more rapidly. There are myriad examples of countries that have done similar things without your natural advantages.
But staying in the euro and trying to pay that debt will just put chains on your children and elderly. You have been in recession for close to five years. Staying in the euro will mean at least another ten. Facing such a bleak future, the young and entrepreneurial will leave, which is what you cannot afford. They are your most precious asset. Without them there is no growth and no future.
Is leaving the euro and returning to the drachma a good choice? No, it will be a disaster. But I think it will be a lesser disaster than staying.