Fears that debt-stricken Greece may be headed for a chaotic eurozone exit loomed large as US President Barack Obama met other G8 leaders for crisis talks in the US on Friday.
The G8 top economies came together as Greece faces its second election in just six weeks, putting its eurozone future in doubt and dragging down Spain, where the government is struggling to keep its banks afloat.
“Time is clearly running out,” London-based Capital Economics analysts said in a note about Greece’s continued political paralysis.
“If the government does not meet the conditions required to receive the next tranche of the bailout, it could run out of money before the end of the summer,” they said, referring to Greece’s EU-IMF loan lifeline.
“It has become obvious that the period up to the Greek elections will be volatile and nervous,” the debt research wing of Dutch bank ING said.
“Speculation regarding a [Greek] eurozone exit will continue and there is hardly anything that can be done about it,” they said.
European stock markets posted sharp losses, mirroring drops in Asia, though Madrid rose in an illustration of the extreme volatility at work.
Money flowed again into Germany, seen as the safest of bets against the risk of contagion from Greece, with investors worried that if Spain needs a bailout, the EU will be hard put to stump up enough rescue funding.
Ratings agency Moody’s downgraded 16 Spanish banks late on Thursday, citing concerns over the crisis, while figures showed the economy slumped in recession and bad bank loans at an 18-year high.
Spain on Friday also revised its public deficit figure for last year, saying that it stood at 8.9 percent of GDP, instead of the 8.51 percent it reported earlier.
The revision came after the latest information was received from the country’s autonomous regions, the budget ministry said in a statement.
The conservative government of Spanish Prime Minister Mariano Rajoy has pledged to cut the country’s deficit to 5.3 percent of GDP this year.
However, the European Commission, in a spring economic forecast for the EU, said that Spain’s deficit would reach 6.4 percent this year and 6.3 percent next year, more than twice the EU limit.
Germany sought to be reassuring on Friday, saying it had no reason to doubt that Spain could help its banks without seeking outside aid — the problem Ireland faced when it had to be bailed out in 2010.
German Chancellor Angela Merkel meanwhile called for a stable Greek government to be formed quickly after elections on June 17 in a telephone call with Greek President Karolos Papoulias on Friday.
In Washington, French President Francois Hollande said Greece should remain in the eurozone as Obama said after talks that the region was of “extraordinary importance” not only to the people of Europe, but to the global economy.