By Mehreen Khan, and Matthew Holehouse in Brussels 27 June 2015
Prime Minister Alexis Tsipras will ask the Greek people whether they will surrender to austerity and keep the euro, as IMF default is now all but certain on June 30
Alexis Tsipras, Greece's prime minister, said the referendum would be held on July 5
Greece's prime minister has announced a snap referendum in a last-ditch attempt to get the country's European creditors to back down over their demands and secure the country's precarious Eurozone future.
Alexis Tsipras called the shock vote, to be held on on July 5, having spent Friday night holed up in an emergency meeting with his cabinet.
The question to be put before voters is whether or not the country is willing to submit to the conditions being demanded by the International Monetary Fund, European Union and European Central Bank.
Speaking to Greek television in the early hours of Saturday morning, Mr Tsipras said: "[Our creditors'] proposals, which clearly violate the European rules and the basic rights to work, equality and dignity show that the purpose of some of the partners and institutions was not a viable agreement for all parties, but possibly the humiliation of an entire people,"
Greece's finance minister Yanis Varoufakis said it was time for the people to decide the country's fate inside the single currency.
Democracy deserved a boost in euro-related matters. We just delivered it. Let the people decide. (Funny how radical this concept sounds!)
Immediately after the announcement, extreme Left wing elements within Syriza called for the country to reject the terms of the lenders.
Panagiotis Lafazanis, Greece's energy minister and arguably the third most influential member of the government, said the Greeks should provide a bloody nose to creditors and deliver a "resounding no" to the terms.
It came after Greece rejected a €15bn rescue plan on Friday, lashing out at attempts to blackmail the country into submission.
Eurozone finance ministers are due to meet in Brussels on Saturday in what had been billed as the last possible opportunity for Greece to surrender and stave off a default and disorderly exit from the Eurozone.
But following Mr Tsipras's dramatic move, European officials said there was now no deal on the table for Greek people to vote on, and discussions over a "Plan B" involving capital controls was being considered.
Creditors will have to prepare for a series of emergency default scenarios, as the banking system would likely face ruin at the start of the week.
Greece is almost all but certain to fall into an arrears process with the IMF on Tuesday as it has no money to make a €1.6bn repayment.
Capital controls in the form of enforced bank holidays and deposit withdrawal limits could come as early as Monday, according to analysts at Credit Suisse.
Ordinary Greeks rushed to withdraw cash from ATMs in the early hours of Saturday morning. Greece's Alpha Bank stopped all online transactions according to its website on Friday night.
Αυτή την στιγμή μεγάλες ουρές σε όλα τα ΑΤΜ
Unbelievably long lineups in almost every single ATM in Athens #referendum
The referendum move is a risk strategy by Mr Tsipras. Four years ago, the country's then prime minister George Papandreou was effectively ousted from office by his European paymasters for suggesting a popular vote on its rescue package in 2011.
Following a week of fruitless and often acrimonious talks in Brussels, Germany's Angela Merkel pleaded with Greek prime minister Alexis Tsipras to accept a "very generous offer" which demands that €3.9bn is raised through tax hikes and pensions reforms in 2016.
"We made it very clear to Mr Tsipras that it ought to be accepted," said Ms Merkel, whose attitude has hardened against the government during five months of protracted negotiations.
Ms Merkel added that there was no "plan B" for the country.
Angela Merkel has run out of patience with Athens after five-months
Athens rejected a temporary five-month bail-out extension, which could see it make a series of crunching debt obligations over the summer.
The plan had been contingent on the Greek parliament passing a number of legislative measures demanded by the Troika, and could release funds that would pay back the IMF and European Central Bank until October.
Mr Varoufakis however rejected the proposals, saying creditors had reneged on their promises, taking a tougher line after some member states thought the demands were too "soft" on his country.
Greece has long pushed for a "comprehensive", rather than partial, deal, which is seen as prolonging the country's agony as the economy has already fallen into recession.
In a sign of how desperate the government's cash grab has become, it failed to make payments to thousands of the country's pensions on Friday and had to rely on funds from the central bank instead.
Greece's paymasters are demanding the government hike VAT on processed foods, restaurants, hotels and the country's popular holiday islands, in return for cash they need to avoid a debt default on June 30.
The proposals have been fiercely resisted by the Leftist Syriza as punishing the poor and crippling the country's thriving tourist industry.
On his departure from Brussels after a testing week, Mr Tsipras vowed not to cede to economic "blackmail".
He promised to defend the European values of “democracy, solidarity, equality and mutual respect”.
“These principles were not based on blackmails and ultimatums, and especially in these crucial times no one has the right to put in danger these principles," Mr Tsipras said.
European Commission president Jean-Claude Juncker denied creditors had proposed such a "take-it-or-leave-it" deal, accusing Mr Tsipras of being "un-European" for perpetuating such an idea. European officials think the prospects of an agreement are now "better than 50pc", according to one official quoted by Reuters.
But the proposal for a temporary deal until November was denounced as "worse than the Memorandum" - the initial rescue programme Greece was forced to sign up to in 2012, and which Syriza vowed to overturn when they were elected in January.
“It would be humiliating, and at the same time tantamount to acceptance of the course towards a third memorandum in November.," said Syriza MP Yannis Micheloyiannakis. "Now is the time to say the big no."
Bank deposits have fallen to an 11-year low, pushing the financial system to the brink of insolvency. Emergency cash from the ECB, which has topped €88bn since February, is the only thing propping up the country's banks.
Without a staff level agreement on Tuesday, the ECB could "lose perspective", pulling the plug on the money and forcing the government to implement capital controls, said Mark Wall, chief economist at Deutsche Bank.
"It follows that bank solvency would deteriorate, eroding the basis for [the emergency money]. This would force Greece to close the banks and re-open them under capital controls."