Greece’s Tsipras Calls July 5 Referendum on Bailout Demands

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Greece's prime minister Alexis Tsipras
Greece's prime minister Alexis Tsipras arrives at Maximos Mansion in Athens on Friday, June 26, 2015. Photographer: Kostas Tsironis/Bloomberg

Prime Minister Alexis Tsipras called a referendum on whether Greece should accept the demands of the country’s creditors, the most dramatic move yet in a debt crisis that started five years ago.

In a nationally televised address after midnight in Athens, Tsipras announced the July 5 vote and excoriated a take it-or-leave it offer as a violation of European Union rules and “common decency.” Deputy Foreign Minister Euclid Tsakalotos said the government has no plans to impose capital controls and banks will stay open on Monday.

The snap plebiscite was announced five months after Tsipras was swept into office on a wave of discontent about budget cuts that deepened a six-year recession. Some members of his Syriza party advocate defaulting rather than backing down from their anti-austerity policies and Greek ministers, including the defense chief, urged the country of 11 million people to vote “no.”

“Our partners unfortunately resorted to a proposal-ultimatum to the Greek people,” Tsipras said. “I call on the Greek people to rule on the blackmailing ultimatum asking us to accept a strict and humiliating austerity without end and without prospect.”

Market Swings

Greek markets have gyrated with each new twist. The Athens Stock Exchange Index rose 16 percent last week, and fell 11 percent the week before that. What’s more, Greek companies, which make up less than 0.1 percent of the broader Stoxx Europe 600 Index, has been dictating European stock moves in recent weeks.

The 30-day correlation between the Euro Stoxx 50 and the ASE has reached 0.7 from almost 0 in April. A correlation of 1 means both gauges move in lockstep.

Tsipras has refused to bend to the creditors’ terms accusing them of prolonging a punishing austerity. While his brinkmanship has taken his country to the edge of capital controls and a potential exit from the euro, the vote also has the potential to settle once and for all the question of whether voters want to stay in the currency area.

Referendums are rare in Greece. In 1974, as the country was emerging from a military dictatorship, Greeks voted against a monarchy and became a republic.

Grexit Vote?

A ‘no’ vote could ultimately draw the curtain on Greece’s membership of the euro. Faced by a rejection of its demands and those of other creditors, the European Central Bank could feel obliged to cut off the emergency funds that the country’s banks rely on for survival. On the other hand, a ‘yes’ vote would spell defeat for Tsipras and may force him into early elections.

“We expect the outcome to be very close and uncertain,” George Saravelos, a strategist at Deutsche Bank, said in a note to clients. “The closer opinion polls are to a ‘‘no’’ vote, the greater probability is” that the market prices in a Greek euro-zone exit.

The majority of Greeks would prefer to stay in the euro even with a “bad” deal with the creditors attached to more austerity measures, according to a poll posted by Greece’s Mega TV on June 16. The poll found that 56 percent of respondents were in favor of staying in the euro compared with 35 percent who said they would prefer default and exit from the single currency instead of a bad agreement.

“The probability of Greece leaving the euro, sadly, has only increased with this decision,” said Nicholas Economides, Professor at the Stern School of Business at New York University, in a phone interview.

Still Meeting?

The surprise development throws into turmoil planned talks Saturday among euro-area finance ministers on their latest proposal, which would unlock 15.5 billion euros ($17.3 billion) and extend Greece’s program through November, in return for a commitment to pension cuts and higher taxes that Tsipras opposes.

Lawmakers from Syriza hit the airwaves this morning to support the decision to hold the referendum. The creditors’ plan is “political punishment” that “removes the oxygen” from the country, Nikos Xydakis, deputy culture minister, said on ERT television.

Debate in parliament on whether to approve the referendum begins Saturday at noon in Athens.

Greece’s Deputy Prime Minister Yannis Dragasakis and Tsakalotos will meet Saturday with ECB President Mario Draghi, a government statement said.

‘Brave Decision’

Since the address came late in Athens, many Greeks hadn’t heard about the decision to put the creditors’ proposals directly to them. In interviews, people turned to their mobile phones to read the news, or flicked on their radios in cars to hear for themselves.

“It’s a very brave decision,” said Yannis, who runs a small trinket shop across from the Greek Parliament, and declined to give his last name. “The European Union are dictators - they are bank dictators, and now we get a chance to tell them what we think.”

Europe broke with the ideology that the euro is forever in November 2011, when German Chancellor Angela Merkel and then-French President Nicolas Sarkozy threatened to kick Greece out unless it continued with the public spending cuts required in exchange for aid.

Greece backed down, power shifted from a left-of-center establishment party to a right-of-center one. The financial drip continued until Greece’s economic suffering brought Tsipras’s radical-left Syriza party to power.

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