Here is a quick primer how to augment the Mundell Fleming model to tell the tale of Greek deficit deception. There is really no intertemporal dimension to the Mundell Fleming Model, which is a problem if one wants to analyse the effects of successive fiscal deficits and the ensuing debt accumulation of a country. However, there is a simple, ad hoc way to extend the model and analyze the Greek crisis.
Chapter 17 (specifically equation 17.8 of International Economics), introduces risk as an explicit determinant of capital flows. Eaton and Gersovitz (1981, wonkish) suggested that a country's debt to GDP ratio may influence capital flows. As a country's debt to GDP ratio rises, investors perceive that country default risk increases. That is, investors start to get worried that the country will not be able to actually repay all the money it borrowed. In response the country is forced to pay a risk premium to maintain its financial account and avoid large capital outflows. To model this, lets say that risk, R, can be proxied by R = R[Debt/Y].
Greece better brace for a nasty recession. Either because the government undertakes the austerity measures to prevent a full out speculative attack, or because in the absence of such austerity measures, financial markets will simply stop lending to Greece and the government is forced to live within its means. That is not going to be easy, after Greeks have just gotten used to the the good life of living above their means.
Of course there is a third option, the other Eurozone countries might find it in their hearts to help Greece. But that would imply that Greece looses much of its economic sovereignty. The European Central Bank already controls Greece's money supply, and if Eurozone countries do decide to undertake a Greek bailout, it will occur only if these countries have strong supervision over the Greek fiscal budget. And, oh, the Greek statistical office has already been split off from the greek treasury's control so it can no longer cook the numbers. Eurostat will now be responsible for Greece's official statistics from now on…
*Eicher and Turnovsky (1999) show that the reduction in output actually aggravates risk even more since it is likely to increase the Debt/GDP ratio further! The increase interest rates (driving up the value of the debt) also do not help…