What will Sunday's Greek referendum mean? Here are some possible outcomes
Stakes in Sunday's vote are high and could reach all the way to Canada
After missing a €1.6 billion ($2.2 billion Cdn) payment to the International Monetary Fund on Tuesday, Greece has gone into technical default on its loans, the first developed economy to do so in the IMF's 71-year history.
The country is now in uncharted waters. Regardless of what some talking heads might claim, nobody really knows what is sure to come next.
- Greece defaults on IMF loan. Now what?
- Greece crisis: The sticking points that scuppered bailout talks
As the world waits, the next major news event will come on Sunday, when Greeks will vote in a national referendum on whether or not the government should agree to tough new austerity measures the country's lenders are requesting in return for another cash infusion.
It's a fast-moving situation with many possible outcomes, and nobody really knows exactly what's going to happen. But there are a few things we know that are possible or even likely, depending on which way the votes go.
If Greece votes No
If a majority of Greeks punch their ballots for Όχι — the Greek word for No — in response to the wordy referendum question, while there's some talk that the two sides could go back and renegotiate again, a more likely result is either an orderly or a disorderly exit by the country from Europe's common currency, the euro.
But what that might look like is hard to predict.
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As is the case with leaving the European Union itself, there's no formal mechanism for a country to voluntarily leave the euro zone — or be expelled from it, for that matter. The nature of the euro zone agreement doesn't allow for the possibility that a country might join it and then leave. That doesn't mean it can't happen, however.
Many politicians made clear this week that the vote on Sunday boils down to a vote for or against the euro, but few put it better than Italian Prime Minister Matteo Renzi: "The euro versus the drachma. This is the choice."
That's a reference to Greece's old currency, the drachma, which would likely be reborn out of a Sunday No vote. Though painful in many other ways, reverting to the drachma would at least let Greece be in charge of its own money supply, which makes it easier to keep the everyday economy growing. That's become a problem in recent days as banks have been shut down until the vote, and withdrawals at ATMs are limited to 60 euros per person per day.
Among the myriad problems with this scenario is that contracts signed in euros would be a nightmare to enforce, as most people would likely prefer to be paid in euros than drachmas that are almost certain to spiral lower in value until the currency finds a natural floor. But that weaker drachma would also be a boon for tourism and Greece's small export sector, as Greece and Greek goods would look a lot cheaper to the outside world.
A No vote would likely mean the IMF isn't the only debt that Greece would be in default on, too. On July 20, the country is on the hook for another large payment to the European Central Bank, which isn't going to have a lot of patience if Greece has already reneged on one major payment to another lender.
There's some question as to where Greece would manage to get the money from to pay its civil servants, which are due to be paid their salaries in the coming days.
We don't see any good outcome from the referendum- Morgan Stanley analyst Daniele Antonucci
Beyond Greece, while direct exposure to Greek debt by other banks is relatively minor, there's always a risk that fear could spread about bad debt, dragging financial stocks lower.
For Canada, the loonie would almost certainly head lower after a No vote. In times of uncertainty, investors always move toward safe havens, with the U.S. dollar at the top of the list. Bank of Montreal said last week a Grexit would likely send the loonie to 76 cents US by the end of this year, and down to around 65 cents by mid-2016.
As Morgan Stanley analyst Daniele Antonucci put it in a recent note to clients, the fact that Greece is even having a vote at all will likely be bad news for the global economy.
"The decision to hold this referendum seems to imply Greece sliding toward Grexit, even though there are no legal provisions for a country to leave," he said.
If Greece votes Yes
A Yes vote, however, isn't much better. For Greece, it almost certainly means that the country's economy, which has contracted by 25 per cent in the past five years, will keep shrinking for the foreseeable future.
After years of cuts, the IMF and Greece's other lenders are now demanding even more cuts to the public sector and new taxes on just about everything. One of the conditions of the deal proposed last week would demand Greece achieve a budgetary surplus of 3.5 per cent (not counting loan repayments).
In an economy that's already in recession, that's a tall order. Consider that Canada's federal government hasn't achieved that feat since 2006, and this country is often lauded for having its financial house in order.
A Yes vote would bring some measure of stability to the Greek question, but it would also likely result in Greeks agreeing to even more drastic reductions to public pensions, services and overall standard of living.
The political ramifications are obvious. A Yes vote would almost certainly mean the end of Prime Minister Alexis Tsipras's government, as he has governed for the past year based solely on renegotiating the terms of Greece's bailout. A vote to not do so would remove his mandate to govern.
Finance Minister Yanis Varoufakis said as much on Thursday, saying that he would personally resign his post immediately if Greeks vote Yes.
Varoufakis said he expects Greeks to reject the bailout proposal and rather colourfully added he would rather "cut off his own arm" than sign a new deal that doesn't restructure Greece's debt.
A new government for Greece would bring its own uncertainty. Consider that Syriza, the ruling party, has cobbled together a coalition out of a centrist nationalist party known as Independent Greeks, but also the support of the far-right Golden Dawn.
That's the party that has raised eyebrows in the West for its neo-Nazi tendencies, including xenophobic policies against various immigrant groups. Any Greek election "could even open the door to fringe groups like the neo-fascist Golden Dawn party," BMO private bank's chief investment officer Jack Ablin said this week.
That alone is reason enough to worry. Ultimately, however, Sunday's vote doesn't have an obvious good choice, or bad choice, in the context of the rest of the world.
As Antonucci put it: "We don't see any good outcome from the referendum.
"Even if it's a Yes the current government could be in jeopardy and a period of political limbo might follow, while its creditability with the creditor institutions remains at rock-bottom."