From the Washington Post & AP – Everything You Need to Know About Greece 

Greeck Finance Minister Yanis Varoufakis casts his vote at a polling station in Athens on Sunday. (Angelos Christofilopoulos/AP)

It’s decision day.
After five years of bailouts, budget battles and a battered economy, Greece is on the brink of becoming the first country to leave the euro zone.
If it seems as if you’ve been hearing some variation of that for a while now, that’s because you have. This time might be different, though, since all the bad things people had only worried would happen are happening. Greece’s government last week missed a critical debt payment to the International Monetary Fund, its banks have been forced to close, and its people are voting today about whether to approve Europe’s austerity demands and stay in the euro zone — or reject them and very likely be forced to leave the historic monetary union.
So how did we get here, and what does this mean for Greece, Europe and the rest of the global economy? The short answer is (1) with a currency that’s a doomsday device for turning recessions into depressions, and (2) it shouldn’t be the end of the world. And the longer one, well, here it is.

1) What’s the situation in Greece right now?

Greece’s voters are deciding their future. Until 12 p.m. Eastern time (7 p.m. in Athens) on Sunday, Greece is holding a referendum on the terms of an austerity package that European leaders insist that the country implement in exchange for continued financial assistance. The referendum asks:

“Should the proposal that was submitted by the European Commission, the European Central Bank, and the International Monetary Fund at the Eurogroup of 25 June 2015, which consists of two parts that together constitute their comprehensive proposal, be accepted? The first document is titled ‘Reforms for the completion of the Current Programme and beyond’ and the second ‘Preliminary Debt Sustainability Analysis.’?”

The essence of the debate is whether Greece should do austerity on Europe’s terms — or its own. In other words, does it have to cut social spending significantly more, or can it reduce deficits by raising taxes?
Syriza, the leftist party that soared to victory on an anti-austerity message, is betting that Greeks will reject Europe’s demands, giving Greece either a stronger hand at the negotiating table, or, if not that, a pathway to shed its debt and reclaim its economy. It’s a gamble that could shape the economy of this nation of 11 million for more than a generation.

2) What led to this point?

It’s a long story that has its roots in the creation of the euro (more on that below), five years of unsuccessful efforts to stem the burgeoning crisis and the diverging experiences of Greece and Germany, Europe’s economic behemoth and decision maker. These two charts make those differences stark:

The first, uncollected tax receipts, shows that Germany has had almost no problem when it comes to taxpayers paying their bills due to the government, while Greece has had an unparalleled challenge. Germany has fewer outstanding tax debts than any other country in Europe, while Greece has more than any other. That difference not only helps Germany enjoy a far more fiscally sound position than Greece, but it offers a stark contrast between a disciplined government and one that historically has been hardly disciplined.
The second, unemployment, shows why Greece wants to take control of its own future. It is suffering the worst unemployment on the continent — worse than unemployment in the United States during the Great Depression — and even worse unemployment among its young workers. When they see that one in two young Greeks is unemployed — a problem that will cast a shadow on the Greek economy for generations — Greece’s leaders want a different course.
More immediately, the referendum was called last weekend by  Prime Minister Alexis Tsipras after negotiations with Europe broke down in Brussels. The European Commission, the European Central Bank and the International Monetary Fund — “the troika” — were giving Greece the money it needed to function and to, well, pay the troika back. The IMF, in particular, insisted that Greece cut its pensions by 1 percent of gross domestic product, and Greece responded that it was willing to cut them only half as much and make up the difference with higher taxes on businesses. When they couldn’t come to an agreement, Tsipras called for the vote.
That led to not only a political escalation of the crisis — but an economic one. There has been a slow-motion bank run the past few months — a bank jog, really — that has picked up pace as it has appeared as if there wouldn’t be a deal. That’s because people were worried that Greece would be forced out of the common currency without one, and their old euros would get turned into new Greek drachmas, which wouldn’t be worth anywhere near as much.

RBS Economics

So when there wasn’t a deal, Greece was forced to close its banks, limit ATM withdrawals to 60 euros a day and prevent people from moving their money abroad in a capitulation to this panic. Then, on Tuesday, Greece announced that it would default on a 1.5 billion euro payment to the IMF. That wasn’t surprising. Greece doesn’t have 1.5 billion euros. It doesn’t have anything. It’s broke.
For a moment it seemed talks might resume last week. Greece’s government was making a last-minute request for a new bailout, and Europe was offering at least minor concessions. But then German Angela Merkel and other creditors made clear that they want to await the terms of the referendum, and the rhetoric coming from Syriza only heated up. And so we here we are.

3) What will be the results of the referendum?

Voting ends at noon, and polls have shown it’s too close too call.
If you’re paying attention to the betting markets, they suggest that Greece will probably vote “yes.”
One thing to notice above: While the Greeks appear split on the referendum, they don’t want to leave the euro zone by a wide margin. And given that they might have to leave if they vote “no,” the betting markets might be guessing that when push comes to shove, more Greeks will opt for the safer course and vote “yes.”

4) What happens after the referendum?

If Greece votes “yes,” there’d probably have to be new elections — Europe doesn’t trust the Syriza-led government to actually implement austerity — and, after that, negotiations would probably continue along the same lines as before.
If Greece votes “no,” it might have a stronger hand in negotiations and Europe might have to relax its terms. But investors would freak out and refuse to lend Greece money at all but the most exorbitant rates, causing a massive financial crisis there, as banks and the government lack essential funds to operate.
Regardless of what happens Sunday, the big risk is what happens Monday, as former Treasury secretary Larry Summers wrote this weekend:

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.

If the ECB won’t immediately give Greece’s banks the money they need, then there are only two ways for them to get it. Otherwise they’ll crash and burn. That’s to either take it from depositors or to print it. The first option, what’s known as a bank bail-in, is what Cyprus did when the ECB stopped propping its banks up two years ago.
But the second option is available only one if Greece has a currency it can print. It doesn’t right now. It has the euro. So Greece would have to ditch it and bring back the drachma if it wanted to recapitalize its banks via the printing press. Both of these are painful, of course, but default and devaluation should be less so for the economy.

5) How terrible is this situation for Greece? Would leaving the euro be an absolute disaster?

The situation is pretty terrible. As this tweet from RBS Economics shows, Greece has suffered one of the worst economic declines in modern history, especially considering that it is not at war.
It is hard to know what the future brings beyond more Depression. But there’s a case to be made that leaving the euro could be a good thing for Greece. If not that, there’s an even stronger case to be made that joining the euro was a bad thing.
As the culmination of Europe’s 60-year project toward greater and greater integration, the euro was a political masterstroke. It was also an economic albatross. And it’s one that wasn’t hard to see coming. Plenty of economists, including Nobel Prize winner Milton Friedman, warned that it wouldn’t work for countries with different economic needs to share a single monetary policy but not a fiscal policy. At any given time, money would be either be too tight or too loose for some members, and there wouldn’t be anything — like unemployment insurance — to balance it out. The euro, in other words, is a paper monument to peace and prosperity that has made the latter impossible for some countries.
None more so than Greece. Its big bubble in the early 2000s was the result of interest rates that were too low for it, and its big bust since is, in large part, the result of a currency that has been too strong. You can see that in the chart below comparing bond yields between Germany and Greece. With a stronger economy and much less debt, Germany should have always paid less to borrow. But investors treated more risky Greece and Germany the same for years, because they were both part of the euro.

When the debt crisis started, though, investors abandoned Greece and rushed for safe havens such as  Germany (and U.S. Treasury bonds).

Now, instead of being able to devalue its way back to competitiveness, Greece has been forced to deflate its economy. That is, it has had to cut wages — which makes unemployment worse — rather than cut its currency.
Nobody wants to get rid of the real problem, and so the other ones continue.

6) But why does everyone care so much about Greece? Its economy is tiny, isn’t it?

It is. Greece’s economy is only about 2 percent of the euro zone’s total. But the best way to think about why something so small still matters so much is to think about how we got here in the first place. Now whenever a country borrows too much, the IMF usually recommends that it write down its debts, balance its budget and devalue its currency. The idea is that it’s pointless to try to pay back more than you can — it can actually be self-defeating — but you also need to become fiscally self-reliant so you don’t have to go back for one bailout after another.

The tricky thing, though, is that at the same time you’re raising taxes and cutting spending, which hurts the economy, you need to get it growing again. Otherwise, shrinking national income might make it harder for you to pay back your debts even though you have fewer of them. And that’s why the IMF prescribes a big dose of monetary stimulus — that is, a cheaper currency — to offset the economic pain from fiscal austerity. That, by the way, is how Iceland managed to recover so quickly though it cut its budget more than any country not named Greece.
But this isn’t what happened in Greece. Well, aside from the austerity. It did get a lot of that. What it didn’t get, though, was a cheaper currency or enough debt relief. This last part is the original sin of Europe’s bailouts. See, back in 2010, policymakers were petrified that the euro zone was like a line of dominoes just waiting to get knocked over by the weakest link. If Greece defaulted on its debt, the French and German banks that had lent it money might go bust, and the banks that had lent them money might, too, and, well, you get the idea. Not only that, but default also might force Greece out of the euro, at which point markets would begin to bet against whatever they thought was the next weakest link. That would push up borrowing costs for, say, Portugal and make it more likely that it would, in fact, default, which would then push up borrowing costs for Spain, and, well, you can fill in the rest. In other words, Greece wasn’t allowed to default, even though it needed to, because doing so threatened to set off a series of self-fulfilling prophecies that could have ripped the common currency apart.
Greece and Puerto Rico face economic disasters. Here’s what you need to know about the defaults and how it will affect the U.S. (Jason Aldag/The Washington Post)
So Greece got bailed out to the extent that it was given money to then give to the people to whom it owed money. That was good news for the aforementioned French and German banks that got their money back, but it wasn’t for Greece. It still had as much debt as before, only now it owed official creditors such as the IMF instead of private ones like the banks. Now, it’s true that two years later, its official-sector debts were given lower interest rates and longer maturities at the same time that its private-sector debts were actually written down. But it wasn’t nearly enough, especially given that it was getting harder for them to pay anything back with their economy collapsing under the combined weight of budget cuts and a too-strong currency. Indeed, since 2008, Greece’s debt burden has shot up mostly because of its economy getting smaller rather than its debts getting bigger.
It took only five years, but Europe finally might be ready for a Greek default. Emphasis, though, on the word “might.” Even though the ECB has created a firewall that should keep any kind of panic from spreading, it hasn’t been tested yet. It should be enough, but who wants to find out? Europe doesn’t if it can help it. But Europe also doesn’t want to not find out so much that it’s willing to give Greece whatever it wants to keep it from happening. This game of chicken, in other words, might end differently than the last.

7) So what does this mean for the global economy?

Maybe not as much as we think. Europe’s firewall seems to be working. It’s hard to say what would happen in the worst case of Greece leaving the euro zone, but it’s probably something like this:

• Greece. The new drachma would plummet, inflation would soar into the double digits, imports such as food and oil might need to be rationed, companies that borrowed in euros might go bankrupt, and the government would have to balance its budget overnight. In other words, things would get a good deal worse than they already are, which is saying something when you’re talking about a country with 25 percent unemployment. But after a year or two, this pain would pass and Greece would be left with a cheaper currency that would make its exports more competitive and its tourism more attractive. It would probably start to recover a lot faster than it would if it stayed in the euro.
• Europe. First off, they’d lose real money here, as in the hundreds of billions. Greece’s government hasn’t just gotten 240 billion euros, but its banks also have received 89 billion euros in loans from the ECB that might be defaulted on in the case of euro exit. Second, there’d be some contagion. Borrowing costs would creep up for Italy, Spain and Portugal, but the fact that the ECB is already buying their bonds and has promised to buy as many as it takes to keep their interest rates low means they shouldn’t rise that much. Third, all this uncertainty should make the euro fall further, boosting their exports in the process. And finally, though this might sound cruel, the worst thing that could happen to Europe is if Greece does well after it leaves. That would embolden anti-austerity parties in the rest of the continent by showing that they have nothing to lose but their fiscal chains by challenging the continent’s budget-cutting orthodoxy.
• The United States and everybody else. Our banks should be fine. Some hedge funds might fail. And the stronger dollar (the flip side of the weaker euro) should make our exports a little less competitive overseas. And that’s it. There really shouldn’t be too much damage from the failure of a country whose GDP is the size of Connecticut’s. The fact that there ever would have been — and there would have — tells you how lacking the euro zone used to be and how it’s slightly less lacking now.

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Mish Shedlock* thinks Greece should pull out of the euro zone, advises them to default on their euro zone debt .. he says it does not make sense for long-term difficult austerity for Greece .. worries if Greece does exit, it would spread contagion to the other countries .. 17 minutes