European leaders and bankers prepare for Greece default as government fails to form

The leader of the Greek left, Foutis Kouvelis, who was the latest of his country’s politicians to be unable to form a coalition (AP)

Financial markets were plunged into fresh turmoil after Greece's political parties failed once again to agree to form a unity government, and European policymakers warned that Greece's aid payments would be cut off unless Athens quickly produced an administration prepared to deliver far-reaching economic reforms and budget cuts.

Without those funds from the European Union and the International Monetary Fund, Greece could run out of cash to meet its national debt interest payments as early as next month. The country would then have no option but to default. Most analysts expect that a default would be a prelude to a Greek exit from the single currency altogether.

Stock markets across the world saw heavy selling in response to the gathering threat of a break-up of the 17-nation eurozone, with the FTSE 100 index in London falling by 1.97 per cent.

The leaders of Greece's major political parties have until Thursday, when the national parliament is due to convene in Athens, to form a national government. Otherwise new elections will be called for June.

A spokeswoman for the European Commission said yesterday that Greece's future remained in its own hands, but added that there could be no question of renegotiating the conditions attached to Athens' international support package.

The German government of Angela Merkel has been the driving force behind demands that Greece commit to deep austerity in return for external support. "It is undisputed that the Greek people have to suffer from the consequences of decades of neglect," said the German finance minister, Wolfgang Schauble, yesterday.

As well as its support from the EU and the IMF, Greece is being kept afloat by the European Central Bank. Yet in recent days European monetary officials have begun to discuss the prospect of life without Greece. "I guess an amicable divorce, if that was ever needed, would be possible," said Luc Coene, governor of the Belgian Central Bank. Patrick Honohan, the head of the Irish Central Bank, said that a Greek exit "can be managed".

However, some analysts warned yesterday that eurozone policymakers are being dangerously complacent if they think the wider economic impact of a Greek default and exit from the single currency would be bearable. "Whoever tells you a Greek exit would be no big deal is an idiot, lying or disingenuous," said Sony Kapoor of the European think tank Re-Define.