Much has been made of the propensity for the Greek referendum’s ability to fracture and fragment the Euro Area further after the weekend’s historic vote. While not necessarily the catalyst for a Euro breakup, it does underline the flaws of the common currency as well as its shortcomings. However, from this point forward, the potential outcome of the Greek referendum is very difficult at best to discern. There are three main options when it comes to Greece’s future, however, time is running out and the noose is tightening.

The Greek economy has been in freefall the last few years as reforms demand by creditors eviscerated the economy. Thousands of businesses declared bankruptcy and unemployment currently stands at a mind numbing 25.60% with youth unemployment approximately double. Debt-to-GDP is the most problematic element facing Greece after two bailouts drove the ratio to 177%. According to even the IMF, this level is unsustainable after a report surfaced last week confirming the perspective of Greek policymakers that the debt is onerous and unreasonable. Until this point, European technocrats have pushed a series of measures that have led Greece to the brink of default and total insolvency.  Raising taxes and cutting spending has rarely worked historically as a means to improve an economy’s function. In almost any circumstance, defaulting and creditor haircuts have proven the best outcome for all parties.  Even though creditors are not necessarily made whole, they receive something in lieu of absolutely nothing.

Right now there are several options for Greece as it seeks to forge a new path and move towards a sustainable recovery. The three most likely options include a series of haircuts for creditors, a depositor bail-in consistent with the Cyprus template, or a total default accompanied by an exit and issuance of a parallel currency.  While ideally the country can call a debt conference with creditors and pressure sides for a compromise vis-à-vis debt relief, haircuts, and restructurings, creditor obstinacy has prevented this scenario.  The Europeans still seek their pound of flesh despite the profound folly of such a move. Instead of building unity among members, lack of relief for the Greeks will likely embolden other anti-euro and anti-austerity parties gaining traction across southern Europe. Squeezing blood from a stone is not a strategy, and creditors ought to realize that something is better than nothing. Kicking out a Euro member sets a terrible precedent and could see other smaller constituents jump ship.

Writing down over 50% of the outstanding bailout debt will undoubtedly hurt creditors, but it will not completely impair them. On the other hand, it will enable Greece to enact essential reforms while avoiding increased taxes that have choked off growth and led to soaring unemployment levels. Yes, structural reform needs to happen in Greece, but changing a country overnight without offering incentives and pro-growth fiscal policies is no way to accomplish a surplus or service existing debt obligations. The scenario in which creditors, led by the IMF, write down existing holding by a minimum of 50% is the most sustainable path for Greece to stay a member within the Eurozone while providing the nation the desperately needed ammunition to grow instead of remaining mired in stagnation. However, this is not going to be a popular idea amongst the major creditor nations because it paves the way to concessions for other bailed out nations seeking to shrink their own debt obligations. Although the best strategy for tackling the existing problems, this is the most unlikely outcome.

The second scenario is depositor bail-ins.  Europeans watch out.  If bank customers are forced to bailout the entire country like what occurred in Cyprus, it amounts to the confiscation of private wealth. While a haircut sets a bad precedent for other troubled nations in the Euro Area, seizure of private funds to boost the sovereign and repay debts amounts to robbery.  Depositors were not necessarily willing and complicit partners to the Government’s overindulgence in the years leading up to the crisis.  Yes mistakes were made, but collective punishment has not been a good strategy historically and that is unlikely to change in present day circumstances.  There have already been rumors floating around about the very possibility that recently imposed capital controls would be followed by bail-ins. However, applying the same template in Greece compared to the one employed in Cyprus only emboldens the same anti-euro and anti-austerity parties policymakers in Brussels are seeking to quash while stoking further resentment in Greece.  This route is considered more likely than debt relief, but still wholly unappealing to the Greeks.

The third and final option is for Greece to go into a state of default, leaving creditor claims behind, exiting the Euro and beginning anew. Default strategically speaking is Greece’s best option. Yes, it would be very painful and the immediate impact would be felt across that nation. While indubitably negative at the outset, it would create a foundation and spring board for the country to return to growth within a shorter timeframe compared to existing options offered by creditors. However, it is a risky play from the perspective of the government as it could lead to chaos.  Shortages will become increasingly common and access to staples will narrow, leading to potential rioting and bloodshed.  On the positive side, it would enable a massive devaluation, improving the economic competitiveness of the nation while keeping key sectors of the economy intact.  This would require Greece to issue a new currency (likely a new version of the Drachma) and while the transition would be agonizing at the outset, the long-term prospects for Greece would be stunning.  This is the most likely option considering the current positions of creditors, but it exposes Europe to the most future risk.

While there is no clear cut path at the moment and everything is up in the air for Greece, there are paths that will invariably benefit the ailing nation. What it comes down to is whether creditors can come to their senses and realize that without comprehensive measures to appease the Greeks and other regional parties, the Euro dream is done. The run up to the decision will almost certainly be a time of increased volatility across European financial assets as to be expected, however, it is setting the stage for a big showdown that will be remembered in the history books.  The question is a matter of which light creditors wished to be painted in.  The day of reckoning has nearly arrived.