Welcome to European Tribune. It's gone a bit quiet around here these days, but it's still going.
Current account. If the country is still running a current account deficit, it will run out of euros for foreign trade, right? Then it would need devalue and a one euro X Note would become less then a euro, ending the currency union. So what time scale are we talking about there?
This is the main reason why it would be necessary to institute capital controls. The least disruptive way to do this is to impose an "exit tax" on money flows. I have proposed to set the exit tax rate equal to the CDS spread of the country. It would also be possible to set it equal to the "risk premium" (10-year yield spread over prime Euro-denominated bonds) on sovereign bonds. Capital controls including an exit tax were introduced by Malaysia in response to the 1997/8 Asian crisis:
Malaysia chose differently. Instead of going to the IMF, Malaysia imposed sweeping controls on capital outflows, fixed the exchange rate, lowered interest rates, and increased spending. From September 2, 1998, foreigners were banned from removing portfolio capital for one year. On February 15, 1999, this was replaced by a graduated tax on outflows, which still remains in place.
(Dani Rodrik on Project Syndicate, July 12, 2001). See also Krugman and a more detailed analysis of how that worked.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Carrie (migeru at eurotrib dot com) on Sun Dec 8th, 2013 at 04:45:59 AM EST
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