Saturday, 27 June 2015

Greece prepares for referendum

Europe's single currency announced that it will not extend financial assistance to Greece beyond a Tuesday deadline, leaving the debt-ridden country without aid for the first time in five years. 

"It is the Greek government's responsibility to stand up to its obligations to international creditors," said Jeroen Dijsselbloem, chairman of the Eurogroup, the informal council of the euro-area finance ministers. 

The decision was a response to a Greek request for a one-month extension, so that Greece could hold a referendum on whether to accept the latest austerity measures proposed by creditors

Greek finance minister Yanis Varoufakis justified the referendum, saying "we do not have a mandate from the Greek people to reject this proposal, but neither do we have the authority to accept it... at least 50 percent of voters should take that decision." 

The parliament in Athens debated the referendum on Saturday. Its vote was due at midnight. 
The ruling leftwing Syriza party he is a part of came to power on 36 percent of the popular vote in January, promising to pass no more austerity measures through the legislature. 

Greek Prime Minister Alexis Tsipras announced the referendum in the early hours of Saturday. 

Although he told people to vote their conscience, he referred to the plan as "an ultimatum" that would add "an unbearable burden onto the shoulders of the Greek people, and undermine the recovery of the Greek economy and society by fuelling uncertainty and exacerbating social inequalities."

The decision soured already poor relations between Greece and its partners to such an extent, that Varoufakis was not invited to a second half of the Eurogroup meeting, although Greece is still technically a eurozone member. 

"Much to our regret, the Greek authorities decided to reject what was on the table, even though talks were not concluded. That was very regrettable," said a clearly irritated Dijsselbloem.

Drawn-out talks

The announcement comes after week-long talks with creditors in Brussels, including three meetings of eurozone finance ministers, the Eurogroup, and two summits of heads of government of eurozone countries. A fourth Eurogroup meeting was scheduled for Saturday afternoon.

Those meetings produced proposals from both the Greek side and its creditors which, on the substance, came considerably close to each other. However, after rejecting a Friday offer for a five-month postponement, Tsipras decided to oppose the creditors' proposals. He proposed the referendum during a late night cabinet meeting back in Athens.

Tsipras may have feared for the unity of his parliamentary bloc. Half a dozen MPs openly rejected the creditors' plan, as did top party bureaucrats. Previous crisis-era governments were critically weakened when austerity bills split their parliamentary blocs, and this is a fate Tsipras may have been trying to avoid.

Article 44 of the Greek constitution allows an absolute majority of all MPs (i.e. 151 out of 300) to vote for a referendum on "critical national issues". The ruling coalition of Syriza and Independent Greeks commands 162 MPs.

Many opposition lawmakers believe that the referendum is a proxy vote on euro membership. Greek governments have felt that elections are not mandate enough to bring unpopular austerity bills to parliament, and they inevitably turn to the people well before their term is over. 

This happened in November 2011, when socialist prime minister George Papandreou also called for a referendum on whether Greeks wanted to remain within the eurozone, along with the austerity prescriptions from creditors this involved. Although the question being put to Greeks now is more specific, the result of the referendum is expected to reflect Greek voters' resolve to keep the euro.

Conservative MP Kostis Hatzidakis said the government is presenting voters with a false choice. "The real question is, euro or drachma? And I am sure that the Greeks will once again say yes to Greece's European perspective. Greece cannot become Albania and Skopje," he said, in reference to former Yugoslav Macedonia. 

Conservative lawmaker Theodoros Fortsakis went as far as to say that the referendum "is unconstitutional because it distorts the substance of the question at hand." 

Many have accused the government of plotting this referendum for months, as part of an agenda to take Greece out of the eurozone. "The opposition should respect the rules of democracy and the government's proposal for a supreme democratic institution which is the referendum," said interior minister Dimitris Stratoulis in answer to that charge. 

"I am optimistic that the Greek people will deliver a "no" majority to the brash demands of creditors, to their threats and ultimata," he said. 

"I wonder, what will a 'no' vote contribute to what you've got?," said conservative lawmaker Makis Voridis. "You have a clear mandate from the Greek people to negotiate. Do you need people to give it to you again? … So what are you really asking for? You’re asking the Greek people to endorse their own exit from the Eurozone. You have every other mandate you need." 

What future for the Greek economy? 

Greece made a second request to one of its institutional creditors on Saturday. It asked the European Central Bank to spend 1.9bn euros in profits made on purchases of Greek bonds repaying a 1.6bn bond it must honour with another major creditor, the International Monetary Fund, on Tuesday. 

The ECB has said that it will return those profits to Greece, but has not specified when or how. The fate of Saturday's request remains unclear. 

Greek cabinet members have said over the past few weeks that the government will not honour its IMF bond without a deal that finances Greece past June 30, when its current oversight programme under the IMF, the European Central Bank and the European Commission runs out. 

A default could trigger all three of Greece's institutional creditors to demand full repayment of some 200bn euros in loans. (Klaus Regling, chief of the European Stability Mechanism, which operates under Commission authority and holds 140bn euros in Greek debt, has already said he will do this). Greece cannot honour such a demand, which will lead to a drop in the value of Greek bonds in world markets. 

Those bonds are the main collateral Greek banks currently use to draw Emergency Liquidity Assistance from the ECB. A default will therefore likely cause the ECB to stop approval of that liquidity, leading to capital controls in Greece. Anticipating this, many Greeks formed queues at ATMs overnight. 

While Greek businesses and households have drawn some 40bn euros in savings since elections were declared in December, the effect of a temporary bank closure and capital controls on the economy has not been accurately gauged. 

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