Greek referendum - necessary but risky

Greece announced yesterday that it will hold a referendum regarding the latest bail-out package among its citizens together with a vote of confidence in the parliament. The question asked from the Greeks is whether they want to adopt the latest aid package or not. It is a "yes" or "no" question which makes it a dangerous one. But first I will outline the core of latest bail-out package to Greece:

• 50% write-down of Greek bonds (meaning that current holders of Greek debt will suffer a 50% loss)
• 130 billion euros 
• further austerity measures and reforms including selling of Greek assets, sacking of numerous public workers, raising taxes etc

All this should reduce Greece's debt burden to 120% by 2015. Greece should return to growth from 2013 (its economy will contract about 5,5% this year). 

The announcement was shocking because reforms carried out in Greece are not popular, yet they are important in order to get support from IMF and EU. The reasoning here is that solvent EU members want Greece and other historical big spenders to behave according to rules and promote economic growth. By supporting Greece and other PIIGS (Portugal, Ireland, Italy, Greece, Spain) the EU can push these countries to carry out painful reforms. 

Now Greece has put the latest package to referendum. While it is good for democracy it may not be good for Europe. Recent polls show that majority of Greeks think that bail-outs are bad or probably bad to Greece. This is because there are no people in Greece that aren't in some way affected by reforms and austerity measures. 

"No" in the referendum held would mean that the government would step down and new elections would be held. This would theoretically cause the IMF and EU withhold their support money causing Greece to be unable to pay out salaries for months possibly. Even though I am fairly positive that even then some agreement with EU and IMF would be reached, it will cause panic and market tumble wiping trillions off bank accounts. Would Greece leave the euro then? How would Greece deal with all this euro-nominated debt if their currency would depreciate 50% for example? What would be the effect on Greek economy? Just look at Icelandic example for that matter!

"Yes" in a referendum would be the best outcome of all since the people of Greece would show their support to change what current Greek austerity measures are all about. This would make it easier for the government to carry out reforms and would win the total support of the parliament as well. Let's hope that Greek prime minister Papandreou knows what he is doing.