European and global policymakers were preparing for a potential financial cataclysm last night, ahead of Greek elections tomorrow, which could determine the future of the single currency.
The head of the European Central Bank, Mario Draghi, signalled that he is ready to enact emergency lending to stabilise the financial system if the election result pushes the country decisively towards the exit door, something that could prompt widespread financial panic. "The eurosystem will continue to supply liquidity to solvent banks where needed," said Mr Draghi.
The Governor of the Bank of Japan, Masaaki Shirakawa, said that central banks around the world will be "carefully watching" the financial markets after the vote. In the event of meltdown, central banks would be expected to allow all major financial institutions under their jurisdictions to borrow unlimited amounts of cash in order to avoid a cascade of bank failures.
The Bank of England yesterday unveiled the details of an emergency lending facility that British banks will be able to access from next Wednesday. Eurozone nations have also been told by the European Commission to draw up contingency plans to cope with the potential chaos that could result from a Greek exit. Limits on euro withdrawals from cash machines and a reintroduction of intra-European border controls have been discussed.
The German Chancellor, Angela Merkel, will hold talks with other eurozone leaders tomorrow evening in the wake of the Greek vote, before flying to Los Cabos, Mexico, for a G20 meeting. In Los Cabos, Ms Merkel is expected to come under renewed pressure from her G20 peers to commit to further German guarantees for the finances of weaker eurozone nations. The French President, François Hollande, has signalled his intention to increase pressure on Germany to approve eurobonds – jointly guaranteed European debt – both in Mexico and at a Brussels summit on 28-29 June. But such suggestions have been met with stiff resistance from Berlin and there were signs yesterday of rising German irritation at Mr Hollande's pressure.
Ms Merkel suggested that the French economy has grown uncompetitive over the past decade. "If you look at the development of unit labour costs between Germany and France, then you see that at the start of the millennium Germany looked rather worse ... while the differences have now been growing a lot more strongly," she said.
Ms Merkel's sentiments about the potential fragility of the French economy were echoed by the former Prime Minister Gordon Brown, who warned that the rapid deterioration in the eurozone's growth prospects could ultimately force Paris to require a bailout too. In a blog for Reuters, Mr Brown wrote: "Portugal and Ireland will soon have to ask for their second IMF programmes. Sadly Italy – and potentially even France – may soon follow Spain in needing finance as the European recession deepens."
Europe's leaders held a conference call ahead of the Mexico G20 meeting yesterday. A Downing Street spokesperson said: "European leaders agreed the need for countries to continue to take the necessary action to secure global economic stability and to support growth"
The eurozone economy registered no growth at all in the first quarter of 2012, and has weakened in recent weeks. Even the German economy is now slowing.
There were indications last night that Europeans might be prepared to offer some concessions over the terms of the Greek bailout if the winning parties accept the broad existing settlement prevail in tomorrow's election.
Sunday's elections: Possible scenarios
What happens if the pro-bailout parties win the election?
Europe will breathe a deep sigh of relief, and will pledge to continue to provide the Athens government with the funds it needs.
Does that mean the crisis will be over?
Not necessarily. Greece's partners will only keep providing the bailout cash provided the new administration enacts the required structural economic reforms.
What if anti-bailout parties win?
Europe and the International Monetary Fund can agree to haggle, or they can refuse to deliver the next tranche of funds for Greece.
What if Greece does not get its bailout funds?
It would not be able to redeem its bonds and will default. The country's banks will be in big trouble. If the ECB cuts Greek banks off from the European financial system, the country will have no reason to remain in the single currency.