World awaits Greek debt vote

It's come to this. Since hidden debts were uncovered in late 2009, and credit default swaps warned of trouble in early 2010, fiscal woes have haunted Greece.

We've had multiple bailout programs negotiated between Athens, the European Union, and the International Monetary Fund. We've had a number of elections. We've had threats of popular referendums on austerity measures. We've had the lingering risk that Greece becomes the first country to exit the eurozone, providing that the currency union is mutable.

And now, with the country back in recession and months of negotiations between Athens and the European establishment breaking down, the Greek people vote Sunday on the last offer that was on the table; an offer that has since been withdrawn, making the vote a "Yes" or a "No" on whether they should supplicate to fresh reforms and austerity measures or cut loose, default on the nation's debt and restore the drachma.

U.S. stocks had their biggest one-day drop of the year on June 29 as investors reacted to the news of the referendum. Capital controls on deposits and transfers out of the country have left the Greek economy on edge, its banks shuttered, its shelves dwindling and its ATMs empty. A decision, one way to another, must be made soon.

Tourism is collapsing. Data released by the Travelplanet 24 and Airticket websites show airline bookings have fallen by half. Businesses are reporting they are unable to process imports or exports, with days of inventory left to fuel production. Shutdowns loom.

The polling is evenly split, with a Bloomberg survey conducted by the University of Macedonia Research Institute of Applied Social and Economic Studies showing "No" ahead 43 percent to 42.5 percent for "Yes." It's not clear what happens under either scenario.

What we do know is that while Greece defaulted on its debt payment to the IMF on June 30, the date that its bailout arrangement ended, the hard deadline comes July 20 when payments to the European Central Bank are due. The threat that the ECB could withdraw its liquidity support of the Greek banking system hangs like a Sword of Damocles over Athens.

We also know that the IMF has softened its position on Greek demands for debt relief, a possible olive branch towards a post-referendum deal that increases pressure on eurozone hardliners in Germany and elsewhere to soften their austerity/reform-only stance. Indeed, Reuters reports that eurozone officials tried to block the study's release this week.

The IMF said the eurozone will need to provide Greece with at least $55 billion in funding over the next three years and a debt writedown of 30 percent to achieve debt sustainability targets set in 2012. At a minimum, this could be achieved by lengthening the maturity of existing obligations, lowering the present value of those debts and lightening the load of repayment to the beleaguered Greek economy.

Alberto Gallo at RBS believes that a "Yes" vote could open the door to a debt-extension agreement, but could result in a political crisis and snap elections.

A "No" result would send a strong signal to Greece's creditors that it won't be pushed around anymore, and would leave the country in limbo without the liquidity needed to reopen its banks. The government would likely need to issue IOUs -- not unlike what California did a few years ago during a budget standoff -- moving it closer to exiting the eurozone. Greece did something similar in 2010 and 2011 with the issuance of "pharma-bonds" that carried zero interest and were freely transferable.

What would be the cost of a "Grexit" scenario? Gallo estimates it would be $250 billion at a minimum versus the $155 billion cost of giving Greece the debt writeoff it needs to prosper within the euro. Total Greek debt owned by public institutions -- like the IMF and the eurozone bailout fund -- is worth roughly $472 billion. Private claims are worth about $144 billion.

Other costs are more nebulous, such as the risk of financial contagion spreading to Spain and Italy and the geopolitical costs of Greece moving away from Europe's sphere of influence. And it's an open question how U.S. markets will react to the vote when the futures market reopens Sunday night.

But one thing's clear: The birthplace of democracy is about hold a direct vote on its economic future. And that's pretty important.