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Greek referendum: Greece projects "no" will win. Here's what it means.

  1. Greece projects a "no" win in today's referendum called by Prime Minister Alexis Tsipras, the Associated Press and Guardian have reported.
  2. The "no" camp is expected to win 61 percent of the vote, a big victory for Tsipras and his party, Syriza,
  3. Formally the question was whether or not Greece should accept the most recent offer from the International Monetary Fund, the European Union, and the European Central Bank of funding in exchange for Greek budgetary and legal reform measures.
  4. More broadly, the question was whether Greece should do what it has to do to remain inside the Eurozone or strike out on its own.
  5. Tsipras and his party, Syriza, urged their countrymen to vote no. They claim this will strengthen their negotiating position in their quest for the financing Greece needs to keep paying its bills.
  6. Almost all non-Greek observers think this is wrong and that the practical consequence of a "no" vote will be Greece's ejection from the Eurozone.

Greece is running out of money and its banks are collapsing

The key issues are that completely apart from Greece's outstanding debts to the IMF and various European institutions, the Greek state is running out of euros and Greek citizens are pulling money out of Greek financial institutions.

Consequently, if Greece is going to keep paying civil service salaries, social assistance benefits, and other bills it is going to need money. By the same token, it will take money to prop up Greek banks and keep the financial system running. One possible source of such money is the European Central Bank and Europe's various governments, but they have made it very clear that they will not pony up additional money unless Greece makes exactly the kind of concessions the "no" vote rules out.

The other possible source of money is for the Greek government to do what most national governments do and print its own currency which it accepts as legal tender — in other words, to drop the euro.

How Grexit would work

There are no provisions in Greek or European law for a country to leave the Eurozone, and consequently there is no formal publicly known procedure for doing it. But Joseph Gagnon, a monetary and currency expert at the Peterson Institute for International Economics, has laid out the steps that would be necessary.

Roughly speaking:

  • Banks would be ordered to stay closed for several days to facilitate the transition.
  • The Greek parliament would pass a law re-denominating every Greek financial asset, wage and price contract, social assistance benefit, and other commercial transaction subject to Greek law from euros into drachmas. Yesterday's 100 euros will be tomorrow's 100 drachmas.
  • New legislation would direct the minting of drachma coins and the printing of drachma currency notes on the fastest feasible schedule — Gagnon thinks it would take about six months.
  • When banks re-open, the drachma would be allowed to float against the euro and would presumably decline significantly in value.
  • During the transition period, euro coins and banknotes would continue to circulate in Greece — presumably with one euro worth considerably more than one drachma — and be used for small payments.

Argentina is the best precedent

Greece's membership in the euro makes the situation unique, but for a reasonably optimistic precedent look to Argentina's 2002 default during which it abandoned a policy of pegging its currency to the US dollar.

This resulted in several months of economic chaos followed by a years-long economic boom. That boom was driven in part by exports and tourism thanks to its newly cheap currency. But it was also driven by a boom in domestic investment as expectations were reoriented around a new paradigm of rising prices and rising wages. In other words, Argentines rushed to exchange their increasingly useless money for long-lasting useful physical objects — new buildings, business equipment, cars, trucks, household appliances, etc.

Unfortunately, while Argentina's default and devaluation worked perfectly well for a number of years they did not alter the economy's underlying structural shortcomings. And rather than take advantage of the boom to tackle those shortcomings, the Argentine government kept relying on stimulative policies eventually resulting in a serious inflation problem and other issues that have dominated the Argentine economy for the past several years.

But Greece faces a number of additional challenges. Unlike Argentina, Greece's economy and foreign policy are deeply intertwined with those of its European partners — partners who Greece will have just infuriated and who have strong incentives to ensure that Greece has a bumpy ride for the next few years.

Greece and the EU — a giant question mark

Even if Greece stops using the euro as its currency, it will still be a member of the European Union. Several EU states are not Eurozone members so this is not, per se, a huge problem. But while the UK, Sweden, and Denmark are grandfathered in to having their own currencies, all new EU members are required to get on board a multi-year pathway to Eurozone membership.

Lacking either a legal agreement to not use the euro or a legal pathway to start using the euro, Greece will be in an unusual kind of limbo. And having defaulted on debts to the EU's major states and to the European Central Bank, Greece will possibly be subject to some form of retaliation from the EU. Conceivably, Greece could wind up leaving the EU as well as the euro with wide-ranging consequences for its economy.