FRANKFURT/ATHENS, May 17: The European Central Bank has stopped offering liquidity to some Greek banks it does not consider solvent, and international concern about the euro zone rose as Athens called new elections that look set to be won by parties opposing austerity measures.
Fears that Athens is on the brink of crashing out of the euro zone and igniting a renewed financial crisis have rattled global markets and alarmed world leaders, with Greece set to figure high on the agenda at a G8 summit later this week.
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 core question will be not Greece, but Spain and Italy,” World Bank President Robert Zoellick said yesterday. 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.
Recession-hit Spain, which faces deep concerns over the health of its banks, is set to see its medium-term borrowing costs rise sharply at an auction today of 1.5-2.5 billion euros of bonds expiring in 2015 and 2016.
FRAGILE BANKING SYSTEM
Highlighting the fragile state of Greece’s banking system, the ECB said yesterday it had stopped providing liquidity to some lenders because their capital was too depleted, confirming an earlier report by Reuters.
“As recapitalisation wasn’t in place, the ECB stopped monetary policy operations,” a euro zone central bank source told Reuters, 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.
International Monetary Fund chief Christine Lagarde warned of “extremely expensive” consequences were Greece to leave the euro zone, 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”.
(AGENCIES)
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