UPDATE: It looks like Greece is actually going to default TOMORROW. A 1.6 billion Euro IMF payment is due tomorrow, June 30th, and it appears that it is not going to be paid. It also seems that the decision to default has already been made, and that the referendum is simply theater. Excellent analysis here by Yves Smith of Naked Capitalism.
The money quote: “a vote on a proposal that has expired has no impact on the default decision, since that is already baked in.”
The payment is due June 30th, and the current offer from the ECB expires on same day. The referendum is not until July 6th. Meaning it would not be possible to prevent default at the ballot box even if Greeks wanted to. (So much for democracy)
(I am writing this from work so I apologize for being quick and dirty.)Today Greece declared a 6 day bank holiday. Honestly I should have anticipated this. Over the weekend Prime Minister Tsipras announced that there would be a referendum on July 6th. I have no idea what the specific wording of the referendum will be, but it will essentially address default. Many will worry that the Greeks will choose to default on their loans. The fear is that the Greeks may reintroduce the drachma, a parallel currency, or that even Euros issued to Greece could somehow be devalued (Note that you can actually look at the serial number of a Euro not and tell which nation it was issued to/for) So, in an anticipation of an adoption of a “new drachma” that will be quickly be devalued, people with the means will want to move their money out of Greece prior to the devaluation the would occur. This is known as “capital flight” and is a big problem as nations need wealth and currency to finance its day to day operations (both public and private). A bank holiday, or bank closure prevents this from happening. (Note that capital flight has been an ongoing problem for Greece for years).
Now, understand that Greece does not have the ability to print Euros, or even Drachmas, but some people have stated that issuing a new drachma could be as simple as removing the Euro symbol on funds tallied electronically, and stamping the physical, paper Euros on deposit in the banks with some sort of ink stamps and doing so to any notes that come in from the public for a period of time. Euros with the prefix “Y” were also issued to Greece. It is possible that these notes themselves could be devalued in some way.
Should Greece default and move to another currency in some way, the decision will be announced, and then the banks will reopen after any action that needs to happen is undertaken (such as one of the substitution methods mentioned above). After this, the currency will be allowed to “float” on the foreign exchange (possibly in an informal method at first), and what is known as a “price discovery” will occur. This basically means that forex traders will come to some sort of consensus on the new present value of this new currency. It will be lower, possibly much lower. This will make life in Greece very difficult for a time. Products imported to Greece will skyrocket in price. There is a silver lining however, in that traveling to Greece and products made in Greece will be much less expensive for foreigners that hold other currencies. This will greatly increase capital inflows to Greece. It will not be instantaneous, but it will ramp up and eventually help Greece recover. It should be noted that one of the complicating factors here is that Greece does not produce much for export and mainly relies on tourism. Greece does control a significant portion of the global shipping sector, but since payments here are already likely received in many currencies, this is likely to be of little help.
What would a default mean?
It means that Greece would be stating that it cannot pay back its debt in its current configuration. It does not let them off the hook entirely. There would be negotiations with creditors and there will be some agreement on a reduced repayment. I mentioned in a comment yesterday, that when Argentina defaulted and restructured its debt in 2005 they agreed to pay back about 30 cents on the dollar. This gave Argentina a great deal more breathing room, and would likely do the same for Greece.
Note that a default does not mean that Greece would leave the European Union. There is a possibility that Greece could also keep the Euro (many do not see this as likely however). There is no legal framework for forcing an EU member out of the EU once admitted, as the process was designed to be irreversible. So it is very likely that Greece will remain in the EU, but possibly with its own currency, in a similar way that the UK is.