In Sunday's referendum Greeks have to choose between a bad and a much worse option. If I was Greek, and I am not, although I speak the Greek language and had a Greek great-grandmother, I would lean towards the lesser evil and vote "Yes". Formally, this is a vote in favour of the proposal made by creditors on 25 June, under which Athens would have committed to more reforms and austerity in exchange for liquidity to avert further disaster. However, this proposal is no longer on the table. So what might happen after a possible positive vote?
The most likely outcome is that Alexis Tsipras, the radical left prime minister and supporter of the negative vote, would resign. Then there would be new elections and today's opposition would form a united front, win the elections and conclude a new agreement with creditors. On one hand, the new government would be able to prepare a better agreement than Tsipras. The euro zone member states and the International Monetary Fund would have greater confidence in it as it would be ready for an agreement and through the referendum, it would have a clear mandate to conclude such. The new government might be able to secure an agreement that would be heavy on reforms in order to overcome the deep problems of Greece but more moderate in terms of fiscal austerity.
Perhaps it would be able to secure a promise to reschedule Athens’ debts if it implemented the agreement properly.
The problem lies in the fact that Greece would start from a much worse position than that before the election of Tsipras. Not only have the past five months destroyed confidence in an economy that was just beginning to recover but the closure of banks has further worsened the situation.
Given that capital controls would be gradually lifted, the best possible outcome for Greece would be to go through the same suffering as Cyprus, where banks also closed in March 2013. The Cypriot economy shrank by 5.4% that year and by 2.3% in 2014 before starting to grow.
Now consider the much worse scenario in the event of a negative vote. Alexis Tsipras believes this vote would give him a mandate to secure a better agreement with creditors. However, it is difficult to understand why this would be so. And in view of the fact that there is no sign of confidence. Creditors would probably consider that "No" means "No" and that there was no common ground for a new agreement. The direct consequence of this would be that banks would remain closed with a limit of withdrawals amounting to 60 euro per day. Probably, after another week, they would totally run out of cash.
The government would not be able to service its obligations to the European Central Bank that would consider the Greek banks as insolvent. Then there would be two options to reopen them, namely through either returning to the drachma or confiscating part of deposits and turning them into bank capital. In practice, the government would probably choose the path of the drachma - something that would cause chaos and lead to years of litigation. Many people would stop paying taxes. To pay salaries and pensions, the government would resort to the issuance of so-called ΙΟUs (I owe you – an informal document for a financial obligation, which will be cashed at a later stage) to guarantee future tax revenues. There would be very little money that would be insufficient to buy even essential goods such as imported medicines or fuels.
The economy would collapse and although this is already happening to some extent, after the possible negative vote, these days would seem like child's play.
In theory, once the storm was over, Greece would be able to grow again, although hyperinflation after putting the new currency into circulation could not be avoided. In conclusion, the positive vote on Sunday would mean two years of recession in the best case whereas the negative would mean short-term chaos, inflation, and then even greater chaos.
Hugo Dixon, Reuters
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