Hangover coming

The folks celebrating the referendum “no” vote in Syntagma Square tonight in Athens are going to have a bad hangover. The Germans will likely stand firm, since doing otherwise would risk undermining the euro’s credibility. If Prime Minister Tsipras respects the referendum, Greek banks are unlikely to have sufficient euros to reopen as scheduled Tuesday.

Athens will need to issue a new currency, which will take time. Once issued, it will fall rapidly in value, making repayment of euro-denominated debt even more difficult. Several debt payments are due during July. The biggest slice is, ironically, owed to Germany (via Aljazeera): Sixty per cent is owed to EU member states and the European Central Bank (ECB). The amount is however relatively small from their perspective, so the default is unlikely to affect the euro much, unless nervousness spreads to Portugal, Italy and Spain. The ECB will want to focus its resources on preventing contagion. Negotiation of the “haircut” on the existing debt, which is what Greece hopes for, will take months if not years, making lenders leery of pouring good money after bad.

Out of the euro and issuing its own currency, Greece will theoretically be able to increase its exports and decrease its imports. But austerity will not end. Greece’s government will be insolvent and not creditworthy, making it impossible to stimulate the economy (or even pay government workers and pensions, except by printing money). Russia may ante up, but with far less than the situation requires. It will also insist on tough terms. Religious orthodoxy is no substitute for repayment guarantees.

Politics could intervene at any point, forcing Prime Minister Tsipras out and leading to formation of a new government committed to cleaning up the mess. But it will be years before confidence is restored. Greece has chosen a hard road that leads to an uncertain destination. Greece used to think it could get the Elgin marbles back from London. Now it will be lucky if it doesn’t have to mortgage the Parthenon.