David Zervos
Image: CNBC
Yesterday, David Zervos of Jefferies sent out a wildly popular note on the Papandreou referendum gambit, in which he explained that this was a classic Greek politician move, and that Papandreou's own father, Andreas Papandreou, once pulled a similar blackmail stunt when he was the Greek PM.

Said Zervos:
Bravo to Papandreou. He is peeling back the layers of the rotten onion that is EMU and exposing the Italian, French and Belgian situations for what they really are!
Since the note was so popular and smart, we figured we'd talk to Zervos directly to have him flesh out his thoughts on Papandreou, the referendum, and the endgame of the crisis.
As he sees it, it basically boils down to this: Greeks believe in Democracy, and don't take referendums lightly. Papandreou doesn't have the answer, and the opposition party hasn't offered anything, except trying to grab power. So it goes to a vote.
The outcome of the vote is all about how it's framed: If it's framed as staying in the Eurozone, it will pass. If it's framed around the costs, perhaps it won't. Ultimately though it's a bad precedent, since Greece will face years of pain and could always just do another referendum down the road.

In the meantime, this is a game of loss distribution: Who pays: The ECB? Taxpayers? The banks? The PIIGS? It's not unlike the loss distribution for the subprime crisis. You were never going to get the homeowner to pay, so it had to be the taxpayer.

Zervos expects Greece to leave, if not soon, then down the road, at which point the large countries will agree to form Euro-bonds that the ECB will feel comfortable monetizing, and establishing a fiscal union.

Germany and even Italy will stick around, the latter since Germany will be worried that if Italy did leave, it would be able to competitively devalue its currency too much.
Below are our fuller notes and quotes from Zervos.
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Regarding the referendum decision:
"One of the bigger negatives of all that is that he didn't really consult with the rest of the Europeans. Not that he has to do that ... The Germans aren't consulting him on a bunderstag vote."
So what drove Papandreou's decision if it wasn't part of the discussion that happened last week with his European counterparties:
"October 28  is an incredibly important day in Greek history, and to have the politicians run out and the people effectively throw eggs at them imagine if people threw Molotov cocktails at U.S. politicians on memorial day." 
"The Greeks are big believers in democracy."

"Where I come away with all of this: Papandreou thinks deep down is I don't know the answers, so okay, you're going to have to pick."
So how will the Greek's vote?
"It's a complicated bet. It's going to depend a lot on what the questions is." [In other words, if its just framed as staying in the Euro, it will pass. If the question acknowledges the huge costs of staying in, then it's a much dicier proposition.]
"I think it's going to be a very hard choice for a lot of people."
Either way, this is still a very bad outcome for the Eurozone, to even have this vote:
"We're still not talking about a solution." [Since Greece debt would still be un-sustainably high under the haircut plan last decided on last week.]

"If the Greeks get frustrated in the future, there's no reason why they don't have another referendum."
As for what the current negotiations are all about:
"We're just trying to figure out the loss distribution." [In other words, we know that loans were made at a level that will never be paid back, so it's just a matter of who pays: Taxpayers through bailouts, bank write-downs, savers through ECB monetization, the PIIGS through a lower standard of living."
"You're never going to get this money from the Greeks."

"Ultimately going to fall on the banks that lent the money, and the taxpayers."

"You're going to hurt savers and taxpayers."
The U.S. of course wrapped private sector losses with the government guarantees, but of course ...
"Europe is having a lot more trouble doing that wrap, since you have 17 different nations."
So how does this end? Eventually a few bad players get punished and leave the Eurozone (probably Greece sooner or later) and then ...
"I think the ECB will be much more comfortable in buying debt, and conducting QE once there are Eurobonds.

"My endgame for Europe is: We lose a few people along the way, some losses are distributed to banks ... and then you wrap the whole thing up in a toasty little eurobond, and then the ECB starts buying the eurobonds."

"The endgame of fiscal union becomes a reality."