How did Greece get here?

A preview of events leading up to the referendum that could decide Greece’s future in the euro zone.

ATHENS, GREECE (REUTERS) – Alexis Tsipras was voted Prime Minister of Greece on a wave of euphoria after his leftist Syriza party won the election in January this year, promising to overturn 5 years of harsh austerity.

With not quite enough votes to form a government, he joined forces with the anti-bailout, far-right Independent Greeks, headed by Panos Kamenos, whom he made Defence Minister.

Also invited to join the cabinet were Nikos Kotzias as foreign minister, and ‘Game Theory’ guru and author, Yanis Varoufakis, whom he made finance minister.

It was all cautious smiles when Tsipras came to Berlin in March to meet the conservative German Chancellor Angela Merkel. Her country is the largest contributor to the EU bailout funds that helped Greece out of its debt crisis in 2010.

Greece owes its official lenders 242.8 billion euros, according to a Reuters calculation based on official data, with Germany by far the largest creditor.

EU leaders worked hard to rein in the leftist leader threatening to throw rocks at the lending institutions previously known as the “Troika”: the International Monetary Fund (IMF), the European Central Bank (ECB) and the European Union.

Alarm bells started ringing louder when, not even a month after the election, Varoufakis opened talks on Greece’s bailout with European partners by flatly refusing to extend the programme or to cooperate with the international inspectors overseeing it.

Tsipras also sacked the heads of the state privatization agency after halting a series of state asset sales.

Varoufakis said Greece had no intention of cooperating with the Troika and that Greece would not seek an extension to a February 28 deadline with euro zone lenders.

Eurogroup chief Jeroen Dijsselbloem responded by saying a decision on the bailout deadline would be reached before the end of February. But he rejected Greece’s push for a special conference on debt, saying that such a forum already existed in the shape of the Eurogroup of euro zone finance ministers.

Athens was left waiting on a final bailout tranche of 7.2 billion euros and was consequently shut out of international bond markets.

Cold turned to frost in Riga in April, when Germany indicated it was already thinking of a plan B, as all signs pointed to Greece defaulting on a 1.6 billion euro IMF loan.

At a meeting of euro zone finance ministers, Greece was sharply criticised for dragging its feet on the preparation of reforms that would unlock funding from its international lenders.

Athens was already running out of cash and needed new lending to service its debts.

After the tense Riga meeting, German Finance Minister Wolfgang Schaeuble hinted that Berlin was preparing for a possible Greek default.

Following months of wrangling over the lenders’ bailout conditions and several proposals put forward by both sides, Greece said it could not accept the bailout demands for pension cuts and tax hikes, and walked out of talks on the measures in Brussels.

In spite of last ditch talks to reach an agreement before the June 30 deadline to pay the IMF loan, Tsipras on June 27 announced a referendum on the bailout conditions.

“A little while ago I called a cabinet meeting in which I suggested we hold a referendum, so that the Greek people can decide in a sovereign way. The proposal was unanimously accepted,” Tsipras said.

During his referendum announcement, the Greek prime minister accused lenders of trying to humiliate the country and throwing an ultimatum.

“At the very 11th hour, and just two days before the programme reached its deadline, he actually said that he would put the proposal, that was not exactly signed by the creditors, to a referendum,” explained constitutional expert Nikos Skoutaris.

“So now we are at the moment where on the one hand, people are asked to vote to approve a proposal that has been withdrawn from the creditors, and on the other hand Tsipras says that if ‘No’ vote wins, then he will have a stronger hand in these negotiations from Monday on with the creditors,” he added.

After its surprise decision, Athens asked for an extension of the bailout programme beyond June 30.

In Brussels, euro zone finance ministers met for the first time without Greece and flatly rejected its pleas to extend the expiring bailout until after the referendum on Sunday (July 5). The stage was set for default.

The ECB, which had over the week before the referendum announcement pumped almost one billion euros a day into the Greek banking system and extended the limit on European Liquidity Assistance, said it would keep the ceiling stable.

Fearing a run on banks, Varoufakis on June 28 announced that the finance ministry would work to safeguard stability and do everything possible to minimise the consequences of the Eurogroup’s decision on the daily lives of the Greek people.

“Starting from tomorrow, the Greek people will show, with a clear mind, that they have the power to make their own decisions with regards to the lenders’ demands,” Varoufakis said.

Later on June 28, Tsipras announced that as of Monday (June 29) the banks would be closed and capital controls imposed.

Meanwhile the euro zone pledged to do whatever it took to stabilize the common currency area and said they were in much better shape to do so than at the height of the debt crisis five years ago. So far, the drama of the last few days has had little effect on other low-rated euro zone debt. U.S. holidays on Friday helped keep volumes low. Analysts say markets have been soothed by ECB firewalls, such as its 1 trillion-euro bond-buying programme.

Swarms of ‘Yes’ and ‘No’ protesters rallied outside parliament on Monday and Tuesday (June 30), with one side calling on Tsipras to resign and an immediate return to the creditors talks, and the other saying they were better off without the euro.

A deeply divisive issue even at the best of times, an angry and exhausted nation is set to vote on the bailout plan, after a week of capital controls that have shut banks, prompted long lines at cash machines and raised fears of petrol and medicine shortages.

Throngs of pensioners besieging bank entrances and leaving empty-handed have become a powerful visual symbol of the price the latest drama has exacted on Greeks, including one image of an elderly man slumped on the floor outside a bank in tears.

Four opinion polls published on Friday (July 3) showed the ‘Yes’ vote marginally ahead, while a fifth put the ‘No’ camp 0.5 percentage points in front. All were well within the margin of error.

No matter the outcome, Greeks are likely to face more of the financial and political turmoil that has driven its economy back into a recession and threatened a national catastrophe.

“If there is a ‘Yes’ vote, clearly it will be very, very difficult for Tsipras to actually go back to Brussels and negotiate on a new deal. Why? Because he is the leader also of the ‘No’ camp. He has said that he supports a ‘No’ vote so, in a way, a ‘Yes’ vote is also a vote of non-confidence against his government,” Skoutaris explained.

“In any case the creditors will think that he is not a credible negotiator if there is a ‘Yes’ vote. If there is a ‘No’ vote, as we said, it is possible that the creditors will say that the Greeks do not want to be part of the euro zone anymore. So whether it’s a ‘Yes’ vote or a ‘No’ vote, it’s very difficult to see how this will play out on Monday,” he added.

If Greeks vote ‘Yes’ to the bailout, Tsipras is expected to resign – triggering a new chapter of uncertainty as political parties try to cobble together a national unity government to keep talks with lenders going until elections are held.

European creditors have said a ‘Yes’ vote will resurrect hopes of aid to Greece, but a battered economy has already suffered such a shock from capital controls and a default to the IMF last week that any new bailout package would likely contain much harsher terms than those on offer even last week.

A ‘No’ vote would bring even greater uncertainty, and the prospect of an immediate financial collapse.

European policymakers have openly warned such a result would be read as a rejection of talks with creditors and the euro, leaving Greece to fend for itself without any realistic prospect of funds to avoid bankruptcy.

“I think that after five years of crisis and after five years of dealing with the Greek case, the Europeans are way better prepared than they used to be to deal with a ‘Grexit’. From an economic point of view,” Skoutaris said.

“I am not quite sure whether they have calculated very well the economic effect, but I think they can survive it. But I also strongly believe that if Greece gets out of the EU, if Greece gets out of the euro zone, there will be questions about the viability of the EU as a political project,” he added.

Others have expressed concern that the referendum result would be inconclusive or very close – sowing further confusion rather than sending a clear signal about Greek intentions and leaving the risk of violent protests as tensions run high.