What The Hell Just Happened In Greece?

Greek_Bond

Greece's Prime Minister, George Papandreou, announced today a referendum on the bailout/austerity measures the EU is offering. Greek bonds have skyrocketed (above is a screenshot of the one-year Greek bond increase). Kevin Featherstone hits the panic button:

At the moment, we could be hours from the collapse of the Greek government. It’s never boring. Or if not hours, next days, couple of weeks. .?.?. At this moment, I’d say the odds that the Greek government survives are 50-50.

Paul Mason sounds equally dire:

[I]f Greece votes no – and goes for euro-exit – there are several plans in the process of being published that explain what you have to do. Close the banks for days, ration food and energy, institute strict capital controls – with most probably a few fast patrol boats at Glyfada harbour to check every departing yacht for cash and bonds.

Tyler Cowen thinks this is an attempt to kill the deal with the EU:

Make no mistake about it, the decision to hold a "referendum" is a decision to turn down the deal altogether. The referendum will never be held.  

Niamh Hardiman comes to the opposite conclusion:

Presumably Papandreou hopes to use the referendum as an educational device to show that only one answer, what we might think of as the technocratic one, is in fact possible – why else would he do it? But it’s a pretty high-risk strategy.

 Yglesias:

[A]ny realistic path to a solution will involve multiple rounds of decision-making, as one crisis after the other is staved off. Which is fine. At any given moment "consensus emerges at the last minute to alleviate the crisis" is more likely than the alternative. But there are so many iterations this whole thing will go through and so many different steps at which it could go wrong that the overall odds for success don’t seem really great to me.

John Cassidy:

Outside the euro zone, Greece could relaunch its old currency, the drachma, which would trade at a much lower rate than the euro, meaning its exports would be cheaper abroad. The country’s banking system would probably collapse—it’s pretty much a basket case already—inflation would rise, and there would be a period of chaos. But, relieved of its debts, the economy would eventually start growing again. At least that’s what happened to Argentina, which, back in 2002, defaulted on its debts and abandoned a one-to-one peg between the peso and the dollar.

 Kevin Drum summarizes the stakes:

If the Greek government falls, and a new government demands a better deal, it's unclear what will happen next. It could be a prelude to Greece exiting the euro in a decidedly non-orderly way, and if that happens there's no telling if the euro will survive. Stay tuned.

Henry Farrell ponders the broader European project. Kostas Kallergis goes in-depth on the insane domestic politics surrounding the referendum. Update from a reader in the financial sector:

Greek bonds have not skyrocketed – it’s Greek yields that are rising so rapidly (and the spreads on their credit default swaps). Greek bonds have been plummeting in price due to the turmoil over the government announcement today.