THE BLOG
07/06/2015 09:39 am ET Updated Jul 06, 2016

Greeks' Decisive No Vote Leaves Europe With 2 Options: Forgive Some Debt or, Worse, Face a Grexit

DUBLIN -- The results from Sunday's Greek referendum are in, and they will be a shock to Europe's political establishment. The Greek government campaigned for a No vote, asking voters to reject proposals that were tabled by the EU and IMF on June 26. The Greek people have decisively endorsed the Greek government's position, with the No side receiving about 60 percent support. So what happens now?

The government argued a No vote would see them negotiate a better deal with their creditors while retaining the euro as a currency and allowing the Greek banks to re-open. It may be possible for some or all of this to happen but they are unlikely to happen over the next few days. Perhaps equally likely is that none of this happens, and Greece exits the euro amid economic turmoil and political rancor.

Prime Minister Alexis Tsipras will now proclaim loudly that he has received an overwhelming mandate from the Greek people for a deal with creditors that involves debt write-downs and less austerity. Indeed, the 60 percent vote for No means that Tsipras has support for his position that runs well beyond people who support his left-wing Syriza party.

Alas, this is unlikely to make much difference with Greece's creditors. The leaders of European countries that loaned money to Greece will point out they also have voters and mandates. They will say the referendum changes little for them. So those expecting negotiations with creditors to be concluded quickly are likely to be disappointed.

"What is needed is for the European creditors to acknowledge something that is widely accepted: that Greece cannot pay back all of the money."

One practical complication is that even if Greece had voted Yes, the June 26 proposals were already off the table. Those proposals related to disbursing new funds under an existing program with the EU and IMF. That program ended on June 30. If Greece is to receive new funding to allow it to avoid further defaults, then a new program will have to be approved by parliaments in all euro member states. So even if negotiations proceed in a constructive manner, Greece may not receive funds in time to pay back the 3.5 billion euros due to the ECB on July 20. A default of this nature could be the event that pushes Greece out of the euro.

In any case, it seems unlikely the upcoming discussions between Tsipras and the creditors will be constructive. The Syriza government has no goodwill with other European countries, many of which are under threat from populist left-wing opposition parties and are keen to show that a radical approach does not work. For example, here in Ireland, Enda Kenny's coalition government is concerned it could lose votes to the left-wing Sinn Fein opposition party if a tougher approach from Greece is seen to yield a better deal than Ireland managed. Sinn Fein has aligned itself with the Syriza government, including sending some of its politicians to Syriza headquarters on the night of the referendum. Some European leaders also seem to believe the way to resolve the situation in Greece is to encourage a change of regime in Athens and then strike a deal with a more "reasonable" government.

All of this points to a negotiating stalemate over the next couple of weeks. The key focus of the crisis during this period will thus be on Greece's banks. The European Central Bank has capped the amount of money Greek banks can borrow and without an increase in this cap, the banks cannot open. The ECB has decided that raising this cap before Greece concludes a deal with its creditors is something that runs beyond its mandate.

"Pushing Greece towards a euro exit   is probably the strategy that will ultimately minimize the return of money to the creditors."

In the meantime, it is becoming clear that the banking restrictions in place in Greece are extremely severe and are having a substantial disruptive effect on the economy. It seems likely the Greek banks do not even have the cash reserves to continue offering customers the 60-euros-per-day withdrawals they allowed last week.

This probably means there is less time available for further negotiations before the Greek government has to consider taking the first steps towards issuing its own currency. One step would be to issue IOUs to pay pensioners and welfare recipients. The government could also announce that these IOUs could be used to pay taxes, which would create a demand for the IOUs.

If the crisis continues for long enough, these IOUs could become a parallel currency with a possible endgame involving the conversion of all bank accounts in Greece into the new IOU currency (i.e. the drachma). The Greek government could then supply as much new currency liquidity to banks as they require, thus allowing them to re-open. The Greek government could maintain they had not really left the euro but were merely taking the necessary steps to keep their economy afloat. In reality, a Grexit would have occurred.

"The Syriza government has no goodwill with other European countries, many of which are under threat from populist left-wing opposition parties and are keen to show that a radical approach does not work."

That said, it doesn't have to be this way. Europe's governments would be well-advised to take a fresh approach to discussions with Tsipras. The decisive nature of the No vote should persuade them to set aside their hopes of forcing regime change and should focus their minds on the practical implications of a Grexit.

The confident assertions from European leaders that they have "ring-fenced" the rest of Europe from the consequences of Grexit are largely bluster. They do not have a roadmap for dealing with the consequences of a country leaving the euro (and possibly the EU), and there are likely to be many unforeseen nasty side effects if this happens.

The clock may be ticking but the truth is a reasonable deal is there to be done. The Greek government have actually accepted the vast majority of the conditions put forward by their so-called partners in Europe. What is needed is for the European creditors to acknowledge something that is widely accepted: that Greece cannot pay back all of the money. A sensible deal involving debt being written off will give Tsipras the political room to agree to conditions very like those rejected in the referendum because it will be seen as an even-sided agreement rather than austerity without end on creditors' terms.

The alternative approach -- pushing Greece towards a euro exit -- is probably the strategy that will ultimately minimize the return of money to the creditors. The moral and economic case for a debt write-down is there. Now it just requires some political courage from Europe's leaders to acknowledge reality and stop pretending Greece is going to pay back all the money.

PHOTO GALLERY
Greece Votes 'No'