Europe

Greek debt crisis: Why a bailout referendum?

Greek Prime Minister Alexis Tsipras on TV, 1 July 2015 Image copyright AFP
Image caption Greek Prime Minister Tsipras told Greeks a No vote would prompt a better deal from the country's creditors

Greece is going ahead with a controversial 5 July referendum on its bailout conditions, despite much criticism of Prime Minister Alexis Tsipras's decision to hold it.

The bailout dispute has frozen credit for Greece's cash-strapped banks - they closed on Monday and will not reopen until 6 July at the earliest.

The leftist Syriza government's surprise decision to call the referendum scuppered its bailout talks with eurozone ministers.

Greece has very little time to prepare for a referendum whose outcome could decide its future in the euro.


What is the point of the referendum?

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Media captionGreek Finance Minister Yanis Varoufakis: "The programme imposed on us will go down in economic history as the greatest cock-up ever"

The government says the EU-IMF bailout terms are unacceptable, but cannot simply be rejected without the Greek people having their say.

In a televised speech on Wednesday Mr Tsipras said a "No" vote would send a clear message that austerity had to stop. He dismissed suggestions that a "No" vote might oblige Greece to leave the eurozone.

He also fiercely attacked other European countries for acting in what he called an undemocratic way.

"They wanted to suffocate our people and this is unacceptable in a Europe of solidarity and self-respect," he said.

He has accused the lenders of "blackmail". And in a letter to eurozone leaders, he said holding a referendum "is a sovereign democratic right of the Greek people".

After five years of recession and welfare cuts many ordinary Greeks feel bitter that they have suffered while Europe's business elite recovered quickly from the financial crisis.

More than democracy is at stake - a vote to reject the bailout could trigger a "Grexit", a Greek exit from the euro. Several European leaders, including Italy's PM Matteo Renzi and France's President Francois Hollande, have warned that a "No" vote would mean Grexit.

Saying "No" would formally cut the euro pipeline from lenders, and the Greek government could be forced to issue IOUs or a "new drachma" currency to keep the economy afloat.

However, the EU has no mechanism for a country to leave the euro - it has never happened before.


What will the question be?

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Image caption Long queues formed at Athens cash machines on Monday as capital controls took effect

The language is quite technical, and many Greeks may struggle to understand it:

"Should the proposed agreement be accepted, which was submitted by the European Commission, the European Central Bank, and the International Monetary Fund in the Eurogroup of 25.06.2015 and consists of two parts, which constitute their unified proposal?

"The first document is entitled 'Reforms for the Completion of the Current Program and Beyond' and the second 'Preliminary Debt Sustainability Analysis'."

Beside the question are two boxes: "Not approved/No; Approved/Yes".

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Image caption The Greek referendum question (published by Greek daily Kathimerini)

Uncertainty still surrounds the referendum. Mr Tsipras has been accused of failing to explain clearly to the Greek public what the lenders were proposing, and what in particular he rejected.

The referendum's validity has been questioned, as some politicians and analysts say it refers to negotiating documents that are no longer relevant.

Europe's main human rights watchdog, the Council of Europe, says the referendum would "fall short of international standards" if held as planned.


Who wants a "No" vote in the referendum?

Syriza, the nationalist Independent Greeks, and far-right Golden Dawn say "No" to the bailout terms.

Opposition parties object to holding a referendum, and their supporters are likely to vote "Yes" or abstain.

The main opposition parties are New Democracy (centre-right), To Potami (centrist) and Pasok (centre-left).

A poll published in Ethnos newspaper on Friday showed the two sides evenly split, with the "Yes" vote at 44.8% and the "No" vote at 43.4%.

Such polls are an indication of the mood, but observers generally treat them with caution.


What was the lenders' reaction?

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Image caption Commission chief Juncker said the EU had made great efforts to help Greece

Anger. Eurozone finance ministers had been preparing for last-ditch talks on 27 June to hammer out a deal on reforms in return for the final bailout instalment that Greece desperately needed.

But Mr Tsipras pulled his delegates out of talks the night before and announced the referendum.

In an unusual move, the European Commission later published the detailed reforms that it wanted to negotiate with Greece.

But the Commission complained that "neither this latest version of the document, nor an outline of a comprehensive deal could be formally finalised and presented to the Eurogroup due to the unilateral decision of the Greek authorities to abandon the process".

Commission President Jean-Claude Juncker said he felt betrayed by Mr Tsipras's move. "Playing off one democracy against 18 others is not an attitude which is fitting for the great Greek nation," he said.

IMF chief Christine Lagarde said any referendum would relate to "proposals and arrangements which are no longer valid".

Germany's Chancellor Angela Merkel says there can be no new Greek deal until after the referendum.

And Eurogroup chairman Jeroen Dijsselbloem has stressed the difficulty of reaching any deal, regardless of the referendum result.


Lenders' proposals - key sticking points

  • VAT (sales tax): A new system to come in from 1 July, with three rates, aimed at boosting annual revenue by 1% of total output (GDP)
  • Most goods to be taxed at top rate of 23%, including restaurants and catering and processed foods
  • Reduced rate of 13% for basic food, electricity, hotels and water
  • Super-reduced rate of 6% for medicines, books and theatre
  • End exemptions and eliminate VAT discounts for Greek islands
  • Create strong disincentives to early retirement
  • Move retirement age up to 67 by 2022
  • End Ekas "solidarity" top-up grant that some 200,000 poorer pensioners get - immediate Ekas cut for wealthiest 20% of recipients, and cut completely by 2020
  • Pensioners' healthcare contributions to rise to 6%, from 4%

Source: European Commission document, 26 Jun 15 (pdf)


Why couldn't Greece get a bailout extension?

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Image caption Poor Athenians collect free meals provided by the army - recession has increased poverty

There remains a big gap between what the lenders want and the Greek government's agenda.

Syriza - a grassroots coalition of leftists - won elections in January promising to end austerity.

The price for Greece's massive €240bn bailout, which started in 2010, was austerity. The budget cuts demanded by the lenders have thrown many Greeks into hardship and a quarter of the workforce is unemployed.

Mr Tsipras has called for a new bailout worth €29.1bn ($32bn; £21bn). But the IMF believes Greece will need about €50bn in extra loans, plus debt relief - something the eurozone lenders are loath to grant.

The lenders say Greece must agree to widen the scope of its sales tax (VAT) - to boost revenue - and drastically reduce the numbers entitled to early retirement. The pension system is unsustainable, they argue.

Those are the main sticking points, but the lenders also want much more action against corruption and tax evasion.

The lenders are not convinced by Syriza's tax income projections. They also suspect that Syriza is unwilling to reform deeply-entrenched working practices.