Investors increasingly nervous as Greek poll nears but Athens denies rumours of eurozone emergency plan
Rumours that eurozone countries are drawing up emergency plans for life without Greece sent share prices plunging on both sides of the Atlantic on Wednesday.
As Europe's leaders prepared to meet in Brussels to discuss the crisis, Athens was forced to issue a formal denial of claims that the "euro working group" of member-country governments had been asked to set out how they would cope if Greece left the single currency.
"Such reports not only are false, but actually hinder the efforts of the Hellenic Republic to address its challenges at this critical juncture," the Greek government said in a written statement.
The FTSE 100 index closed 136 points lower amid the nervous mood, at 5266, a fall of 2.5%. The French CAC lost 2.6%, and Germany's DAX shed 2.4%.
Investors are watching nervously as the Greek electorate prepares for elections on 17 June, after an inconclusive poll left the balance of power in the hands of anti-austerity parties. Europe's leaders have urged the Greeks to see the upcoming poll as a referendum on euro membership; but the risk of Greece leaving is putting pressure on other vulnerable countries such as Italy and Spain. The Italian stock market index was down 3.7%, and the Spanish market was off 3.2%. On Wall Street the Dow Jones was down 161 points at 12,340 by mid-morning, a fall of 1.3%.
A paper from Germany's Bundesbank spelling out the possible consequences if Greece fails to fulfil the promises of tough austerity measures made when it received its €130bn bailout earlier this year added to the sense of a looming crisis.
"When the euro system provided Greece with large amounts of liquidity, it trusted that the programmes would be implemented and thereby ultimately assumed considerable risks. In the light of the current situation, it should not significantly increase these risks," the Bundesbank said, suggesting that parliaments and governments of other member states should decide whether to offer any more help to Greece.
Simon Derrick, currency strategist at BNY Mellon, said: "Everyone's going through the same basic process of saying, is anything going to happen before 17 June 17, and what are the possible outcomes on 17 June?" He added that governments such as Germany and the Netherlands have shown an increasingly frustrated tone in recent weeks. "You get the sense that they have been pushed as far as they could and they will not be pushed any farther."
The sharp divide between healthy countries such as Germany and its stricken southern neighbours was underlined by an auction of German debt, which saw Berlin sell €4.6bn-worth of two-year bonds at a record low yield of 0.07%.
That's less than the rate of inflation, so that buyers are accepting a negative real yield on their investment.
Sony Kapoor, of Brussels-based thinktank Re-Define, said: "The new record low negative real borrowing costs being enjoyed by Germany and other AAA-rated eurozone countries are less a reflection of their strength and more a symptom of investor desperation amid all the talk of a Greek exit."
He added: "As long as the new record highs being tested by German bonds are seen by some as a reflection of German economic strength, rather than as a sign of a eurozone in crisis, it will make a political solution harder."City analysts are holding out little hope that tonight's meeting will yield anything radical enough to staunch the crisis and ensure that the consequences of a Greek exit from the eurozone could be contained.
Chris Beauchamp, of IG Index, said, "today is the anniversary of the Defenestration of Prague in 1618, the start of the 30 Years' war. Frankly, it seems as if this crisis has been going on for 30 years...Hopes for today's EU summit have been well and truly chucked out of the window, as the Germans once again state their firm opposition to eurozone bonds as a means of solving the crisis. Berlin has ignored the pleas of the OECD, IMF and its allies in Paris and Rome, believing that such a solution would only worsen the spendthrift ways of their southern neighbours.
"There will probably be little progress at tonight's meeting," said analysts at Citi. "It will probably require more pressure from the market and from deposit holders at periphery banks to agree on measures such as a likely euro-area-wide deposit guarantee scheme. In our view, broad-based common bond issuance is unlikely to take place any time soon.
John Higgins, of Capital Economics, said, "stock markets fell back sharply again on Wednesday and the euro came under further pressure as doubts grew that the evening's informal meeting of EU leaders in Brussels would do much to prevent an imminent exit of Greece from the euro-zone."
