Where Does Greece Go After ‘No’?

What does “Oxi” mean? Well, literally, it means “no” in Greek — the position that over 60 percent of Greeks took in Sunday’s referendum on Greece’s status in Europe. But what this particular full-throated “no” means in practice is hard to say.

Clearly, there is some talking to be done. Greece has dumped its contentious Finance Minister, Yanis Varoufakis. Prime Minister Alexis Tsipras has said he is ready to return to the negotiating table. German leaders, unhappy with the referendum, have said they do not see any basis for new bailout negotiations, but that Greece could present proposals if it wished.

Greece has been in one form of crisis or another since 2010, so it is tempting to think that the referendum was just another mile marker and now the standard haggling will resume. This time, though, it’s different.

Greek banks are closed. When a modern economy’s financial system shuts down, it is the equivalent of cutting off oxygen to a body. You can keep going for a little while, but things get urgent, fast. On the eve of the Greek referendum, The Economist had a striking piece detailing what starts to happen when access to banks and credit is severed. It isn’t pretty.

So, ignore the bluster and focus on the banks. When and how will they reopen? Here are three possibilities:

1) The eurozone powers and the European Central Bank (ECB) offer up a generous program that persuades everyone that Greek banks are completely backstopped. Banks welcome customers back in.

2) The eurozone powers and ECB provide a finite amount of assistance to backstop the Greek Banks, perhaps 5 or 10 billion euros of Emergency Liquidity Assistance, with promises to revisit the issue soon. Banks would reopen with this assurance.

3) There is no new money from Europe. The Greeks are on their own. Banks have nothing to pay out.

The first possibility would be the equivalent of deposit insurance in the United States. It would calm fears and, if credible, persuade the Greeks to take their money out from under their mattresses and put it back in the banks. Crisis averted. But it amounts to a blank check, would pose enormous legal and political difficulties in Europe (for a start, it would look like a complete capitulation to Tsipras), and is almost certain not to happen.

The second possibility is a textbook recipe for a bank run. If you tell people that banks will be open this week, but who knows about next, people will grab their money while they can. The money will quickly be drained from the banks and nothing will have been accomplished, other than a transfer from the rest of Europe to Greek depositors.

The third possibility would mean further asphyxiation of the Greek economy. That cannot last for long. Pretty soon, the Greek government would need to pay workers and pensions and other domestic obligations. Without enough euros to do this, it could resort to printing IOUs. In effect, this would be the introduction of an alternative currency. That would be the first step toward a Greek exit from the euro.

The resounding Greek “Oxi!” means that summitry may continue, but time is running short and it’s getting harder and harder to see how Greece stays in.

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