Mostly everyone is focused on whether Greece approves or rejects a referendum Sunday on Europe's austerity program. A "yes" vote means that the ruling party, Syriza, will likely step down, and Greece will be back at the negotiating table seeking continued financial aid from Europe in exchange for tough austerity measures. A "no" vote could empower Syriza to demand better terms from Europe, but it might also well mean that Greece would have to abandon the euro. The vote is too close to call.
But for all the focus on it, Larry Summers, a former Treasury secretary and veteran of financial crises, says the referendum is only the second most important event in Greece this week. The most important comes after that -- probably on Monday. That's when its banks likely will run out of funding.
On his Web site this afternoon, Summers offers a brief but chilling analysis of what that will mean.
Tomorrow Greece votes. No one can know the outcome yet. Indeed, my bet is that a third of the voters are not yet sure how they will vote. If polls could not get the British election right, I doubt that they can get this one right. Anything can happen, and it would not surprise me if the vote is a landslide, one way or the other.
Many suppose that after the referendum, matters will revert to where they have been, with a painful negotiation again underway between Greece and the European authorities. The idea is that a yes vote will empower the European authorities and a no vote will increase Greece’s leverage. This presumes that it is possible to return to the world of two weeks ago. It isn’t – with banks closed and capital controls in place.
The referendum is probably the second most important event of the week in Greece. However it turns out, Greek banks will run out of cash early in the week, probably on Monday. There will be an immediate need to either provide them with some sort of IOU scrip to meet demand for funds or to resolve them in some way, as Greece lacks the capacity to create Euro. What the Europeans do and the decisions the Greeks make will shape the future of Greece and the Euro area.
There is a further paradigm changer. The [International Monetary Fund] at last has acknowledged the painful truth that to have a plausible chance of success far more support for Greece will be necessary along with drastic debt relief. This will make any deal along the lines of what was under discussion in Brussels untenable, as no will see it having a chance of success.
Rapid constructive improvisation will be necessary immediately following the referendum no matter how it turns out. After months when both the Greeks and the Europeans have surprised negatively, let us hope that beginning Sunday night, the risk of catastrophe will concentrate minds and lead to positive surprises.