World braces for worst case scenario as Greeks cast their votes

Europe offers banks a blank cheque should election trigger withdrawal from the euro

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.

Ben Chu

Suggested Topics
Start your day with The Independent, sign up for daily news emails
PROMOTED VIDEO
ebooks
ebooksA year of political gossip, levity and intrigue from the sharpest pen in Westminster
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs General

Recruitment Genius: Account Manager

£20000 - £35000 per annum: Recruitment Genius: This full service social media ...

Recruitment Genius: Data Analyst - Online Marketing

£24000 - £35000 per annum: Recruitment Genius: We are 'Changemakers in retail'...

Austen Lloyd: Senior Residential Conveyancer

Very Competitive: Austen Lloyd: Senior Conveyancer - South West We are see...

Austen Lloyd: Residential / Commercial Property Solicitor

Excellent Salary: Austen Lloyd: DORSET MARKET TOWN - SENIOR PROPERTY SOLICITOR...

Day In a Page

Isis in Iraq: Yazidi girls killing themselves to escape rape and imprisonment by militants

'Jilan killed herself in the bathroom. She cut her wrists and hanged herself'

Yazidi girls killing themselves to escape rape and imprisonment
Ed Balls interview: 'If I think about the deficit when I'm playing the piano, it all goes wrong'

Ed Balls interview

'If I think about the deficit when I'm playing the piano, it all goes wrong'
He's behind you, dude!

US stars in UK panto

From David Hasselhoff to Jerry Hall
Grace Dent's Christmas Quiz: What are you – a festive curmudgeon or top of the tree?

Grace Dent's Christmas Quiz

What are you – a festive curmudgeon or top of the tree?
Nasa planning to build cloud cities in airships above Venus

Nasa planning to build cloud cities in airships above Venus

Planet’s surface is inhospitable to humans but 30 miles above it is almost perfect
Surrounded by high-rise flats is a little house filled with Lebanon’s history - clocks, rifles, frogmen’s uniforms and colonial helmets

Clocks, rifles, swords, frogmen’s uniforms

Surrounded by high-rise flats is a little house filled with Lebanon’s history
Return to Gaza: Four months on, the wounds left by Israel's bombardment have not yet healed

Four months after the bombardment, Gaza’s wounds are yet to heal

Kim Sengupta is reunited with a man whose plight mirrors the suffering of the Palestinian people
Gastric surgery: Is it really the answer to the UK's obesity epidemic?

Is gastric surgery really the answer to the UK's obesity epidemic?

Critics argue that it’s crazy to operate on healthy people just to stop them eating
Homeless Veterans appeal: Christmas charity auction Part 2 - now LIVE

Homeless Veterans appeal: Christmas charity auction

Bid on original art, or trips of a lifetime to Africa or the 'Corrie' set, and help Homeless Veterans
Pantomime rings the changes to welcome autistic theatre-goers

Autism-friendly theatre

Pantomime leads the pack in quest to welcome all
The week Hollywood got scared and had to grow up a bit

The week Hollywood got scared and had to grow up a bit

Sony suffered a chorus of disapproval after it withdrew 'The Interview', but it's not too late for it to take a stand, says Joan Smith
From Widow Twankey to Mother Goose, how do the men who play panto dames get themselves ready for the performance of a lifetime?

Panto dames: before and after

From Widow Twankey to Mother Goose, how do the men who play panto dames get themselves ready for the performance of a lifetime?
Thirties murder mystery novel is surprise runaway Christmas hit

Thirties murder mystery novel is surprise runaway Christmas hit

Booksellers say readers are turning away from dark modern thrillers and back to the golden age of crime writing
Anne-Marie Huby: 'Charities deserve the best,' says founder of JustGiving

Anne-Marie Huby: 'Charities deserve the best'

Ten million of us have used the JustGiving website to donate to good causes. Its co-founder says that being dynamic is as important as being kind
The botanist who hunts for giant trees at Kew Gardens

The man who hunts giants

A Kew Gardens botanist has found 25 new large tree species - and he's sure there are more out there