With just two days to go until Greeks decide their fate in the eurozone, the country is split down the middle, a new poll shows. The survey, commissioned by Bloomberg [11] and conducted by the University of Macedonia Research Institute of Applied Social and Economic Studies, shows that “43 percent intend to vote ‘no’ to reject the austerity demanded by creditors in exchange for financial aid, while 42.5 percent back a ‘yes’ to accept the conditions.”
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Bloomberg goes on to say that support for a ‘no’ vote has dwindled since Tsipras first announced the plebiscite last week, which seems to suggest that the bite of capital controls has quickly forced many Greeks to reconsider whether the benefits of standing firm in the face of overbearing creditors truly outweigh the economic costs of an EMU exit.
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The narrowing lead for the “no” side comes as IMF research appears to support Tsipras and Varoufakis’ contention that any feasible Greek deal should include debt relief.
As we said on Thursday [14], the report (which was prepared prior to capital controls and the banking sector meltdown) shows that any deal which includes creditor concessions on fiscal reforms would mean Greece's debt load would have to be written down, as the country would need at least €60 billion in new financing. Subsequently, the media and sell side chimed in. Here’s Barclays for instance:
The IMF released yesterday a document with a revised debt sustainability analysis for Greece. The document basically argues that OSI is a necessary condition in order to secure sovereign solvency with a high probability. This means that before the IMF re-engages in any lending activities with Greece, OSI will be required in the form of NPV debt relief.
The timing of the publication of this report it is very important. Debt relief is something that the Greek authorities have repeatedly demanded; therefore, in a way this report can be interpreted as the IMF backing the Greek government's demands. By extension, it could also be interpreted as supportive of a 'No' vote, which is what the Greek government is campaigning for.
We’ll see over the weekend, if the “no” vote is bolstered by the IMF’s findings.
Meanwhile, Wall Street continues to speculate on what happens in the event of a “no” or worse, a tie. The following is excerpted from Credit Suisse "Greece: A Thread In The Labrynth."
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The Result Of A "No": A Live Test
We believe that in the case of a ”No” vote in the referendum that the creditors will reject any further deal with near certainty and the only outcomes are either a systemic crisis or a contained idiosyncratic crisis.
A particularly bad scenario for Greece would be some sort of split vote, e.g., 51% voting “No”. We think Tsipras would likely claim to have won the backing of his policy by the electorate – assuming he campaigns for a “No” till the end – while nearly half the population would have voted in favor of the creditors’ deal. This could cause unrest domestically in Greece, while the creditors would probably be less inclined to acknowledge Tsipras’ “victory” under such circumstances. A relatively low participation rate would further reduce the credibility of a marginal “No” vote, in that regard.
We again want to be clear: “leaving EMU” is not a policy choice and, if enforced by referendum, materially reduces Greece’s freedom of action. Introducing a new currency is a pipe dream and the likely result is a broken financial system reliant on a neighbor’s currency (the euro) and banking system.
If the result of the Greek referendum is a “No” and the situation is not immediately remedied (which we would not expect), the Greek people will probably have taken the opportunity to illustrate how illusory the whole idea of “exit” actually is. How that unfolds determines whether the situation systematizes immediately. This is because the choice is not “do you accept the core’s terms your government has rejected?” Rather, it is “do you want Greek banks to function independently?” and, de facto, do you want to be able to use the cash machine tomorrow? This is the nature of “Grexit”; it is not a choice to circulate a shiny new devaluation mechanism, it is a decision to reject the (local, to begin with) financial system and start again.
We have always pointed out that the new “currency” mismatches involved in any attempt to exit the euro would be so "toxic" for the banking system as to make it not a practical alternative. It is certainly not a way to avoid default. Rather, an attempt to exit is a way to default, at the expense of making that default systemic and so more costly. We are seeing this right now, with anecdotes of large dislocations and the reality of a closed banking system.
This fact seems to get less than its fair share of attention. The Greek banking system is closed. How does it reopen given a “No”? So “No” should be a dominated policy option and a properly informed Greek public should rationally vote “Yes”. Yet we cannot confidently give it more than a 50:50. The closed banking system imposes real pressure and a deadline. The 20 July date we have always pointed to now has real teeth; three weeks is the absolute maximum we would expect Greece to be able to function in this state.
The “loss of sovereignty” resulting from this dilemma could be a dominant consideration leading to an irrational outcome (“better a day as a lion…”). As always, we have to be VERY careful with the “rational player hypothesis” in these situations. And the core pointing out that the question can be reframed as “do you want a banking system”? and “do you want to stay in the euro” could be criticized as "moral blackmail", but it is the reality of the implications of having joined a currency area. The time for these concerns was in the run-up to 2001. We are all learning about these realities and Greece could again be an illustrative test case. We stick to our view that “nobody leaves” and any new drachma (which we strongly doubt) would effectively be a transitory default mechanism on the way to an economy that was euro-ized without the votes on the ECB GC. We could call it the “Panamization” of Greece. But where is the 13%-capitalized banking system which is required going to come from? At a minimum we would see €40 billion of untainted capital being required. Some of it could come from the existing capital structure under resolution but we believe that the balance could not come from Greece itself (a state in a serious state of default) without triggering immediate collapse and returning to the path of the new arrangements being a default vehicle on the way to euro-ization only now without a domestic banking system at all).
The far more likely outcome, in our view, of an attempt to leave (i.e., of a “No”) is a banking system that can only open under foreign (nationalized) ownership. This seems to be a very likely step given the apparent intention of the core to honor guaranteed deposits. But all of this would of course be contingent on some form of cooperative outcome. In the absence of that—and relations are already manifestly more strained; a change of government may help—we would have to suspect that Greece’s EU membership would be under threat. And as this situation becomes ever more political, that would be a huge issue well beyond our scope but which highlights our view that the mechanism for systematizing this situation is political not financial. It seems unlikely that the 13% capitalization needed to rebuild a banking system could come from a non-Western power, but the concern obviously exists.
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Summing up, Credit Suisse believes a "no" vote is effectively a vote for economic catastrophe. The banks would, for all intents and purposes, have to be nationalized by Germany (which, given the Greek banking sector's complete reliance on the Eurosystem for funding, and given Berlin's TARGET2 position relative to the rest of the EU, would simply be to make official what has already been going on for years), and the (re)introduction of the drachma would not only be a disaster, but is in fact an unworkable "pipe dream."
In short, the bank says that if Greeks were "properly informed", they would not, in their right mind, vote "no."
So perhaps we have a new way to characterize Sunday's vote: a sanity check for the Greek populace.
