Financial markets are hastily making preparations for a Greek exit from the euro after a day of political and economic turmoil ended with Europe’s policy elite admitting for the first time that it might prove impossible to keep the single currency intact.
With attempts in Athens to form a government after last week’s election looking increasingly doomed, European leaders abandoned their taboo on talking about the possibility that Greece might have to leave the euro.
Shares, oil and the euro were all sold heavily on Monday in anticipation that anti-austerity parties would garner increased support in a second Greek election likely to be held next month, bringing the row between Greece and its European creditors to a climax.
Amid claims in the markets that politicians in Athens were playing a dangerous game of bluff, a potential schism in the EU saw borrowing costs for Spain and Italy rise over fears that contagion could spread from Greece through southern Europe.
London’s FTSE-100 lost almost 2 percent of its value, dropping more than 100 points, and there were big falls in share prices in Paris, Frankfurt, Madrid and Athens.
“The Greeks seem to be playing a game of chicken here, first of all putting party politics above sovereign interests and secondly, in the bigger picture, questioning whether the European Central Bank are bluffing when it comes to not offering them bailout money if they fail to form a government,” said Chris Towner, director of foreign exchange advisory services at currency traders HiFX.
On Monday night, City of London firms were making sure their computer-trading systems could cope with the return of the drachma and they were predicting that a “gray market” in a new Greek currency could be operating within the next few days, but despite the market turmoil and the anti-austerity mood reflected in the elections in Greece and France, finance ministers meeting in Brussels said there could be no softening of the tough conditions that Athens agreed to last year in return for a US$130 billion rescue package financed by the EU and the IMF.
The talks openly discussed the likelihood of Greece quitting or being kicked out of the euro, while also differing over whether Greece would also need to leave the EU.
Gaffe-prone Austrian Minister of Finance Maria Fekter said there was no basis in EU law for a country leaving the single currency, but noted that the Lisbon Treaty included provision for a country departing from the EU.
German Chancellor Angela Merkel, by contrast, stressed that Greece would “always” be in the EU, a statement interpreted as meaning it might not always be in the euro.
Following suggestions from Luxembourger Prime Minister Jean-Claude Juncker, the Euro Group chairman, that Greece’s debt reduction timetable should be relaxed, the Germans made clear that no such loosening could be permitted.
With central bankers across the eurozone openly discussing the pros and cons of a Greek departure, it appeared that the terms of the debate had shifted toward accepting the inevitability of a Greek exit. Talk of the impact of a return to the drachma was predominant, split between those who believed the fallout from an outright Greek default could be contained and those who thought that the knock-on effect, particularly in Spain, would shift the eurozone debt crisis into an entirely new dimension.