The European Central Bank (ECB) has stopped offering liquidity to some Greek banks it does not consider solvent, and international concern about the eurozone rose as Athens called new elections that look set to be won by parties opposing austerity measures.
The risk of the contagion spreading to bigger European economies that are vulnerable due to high debt or weak banks has sent stocks and commodities tumbling, and driven Europe’s single currency towards its lowest levels this year.
The euro traded around US$1.2740, off a four-month low of US$1.2681 reached in the previous session, while the US dollar , measured against other key currencies, edged up to near a four-month high reached on Wednesday.
European shares ticked higher at the open yesterday in line with a recovery in Asian markets, but quickly turned lower with the FTSE Eurofirst index of top European shares down 0.4 percent at 988.47 points.
“The core question will be not Greece, but Spain and Italy,” World Bank President Robert Zoellick said on Wednesday.
If Greece left the euro zone, the ripple effects could be very damaging and reminiscent of when Lehman Brothers investment bank collapsed in 2008, spreading panic on global financial markets.
Highlighting the fragile state of Greece’s banking system, the ECB said on Wednesday that it had stopped providing liquidity to some lenders because their capital was too depleted.
“As recapitalization wasn’t in place, the ECB stopped monetary policy operations,” a eurozone central bank source said, declining to be identified.
That meant the affected banks can no longer offer assets to the ECB as collateral for loans, and would have to seek costlier emergency financing from the Bank of Greece.
It was not immediately clear which banks, or how many of them, were affected. One person familiar with the matter said the capital of four Greek banks was so low they were operating with negative equity.
IMF Managing Director Christine Lagarde warned of “extremely expensive” consequences were Greece to leave the eurozone, a once taboo possibility that European leaders have now begun to discuss openly.
Echoing Zoellick’s comments, Lagarde told Dutch television any Greek departure from the euro “would be extremely expensive and hard, and not just for Greece.”
An EU official conceded that other G8 countries, whose leaders are due to meet at US President Barack Obama’s Camp David retreat at the weekend, had signaled heightened concern at the deepening political crisis in Athens.
“We have been confronted ... by a number of concerns on what might happen,” the official said. “This concern has become more pronounced after the result of the Greek elections.”
The leftists argue they can tear up the bailout deal and keep the euro, but European leaders say that if Greece fails to meet promises to them, lenders will pull the plug on financing.
Greeks have withdrawn hundreds of millions of euros from banks in recent days as the fears grow that the country might be forced out of the euro zone, although there has been no sign of a run on Athens bank branches.
ECB President Mario Draghi said that under the EU treaty, it was not his job to decide what happened to Greece.
“I want to state that our strong preference is that Greece will continue to stay in the euro zone,” he said in Frankfurt. However, he added: “Since the treaty does not foresee anything on [an] exit, this is not a matter for the ECB to decide.”