Daily Mail Online
By ADRIAN LOWERY
May 18, 2012
Stock markets across Europe continued to slide today as it emerged that European Union officials are preparing a plan for Greece to bomb out of the euro.
EU officials have insisted they will not countenance Greece leaving the eurozone, but trade commissioner Karel De Gucht today admitted the European Commission and the European Central Bank were working on Greek exit scenarios.
Coming on the back of a disastrous downgrade for Spanish banks last night which swept Santander UK into the wake of the eurozone crisis, the revelation helped the FTSE 100 index to remain firmly in the red, with a drop of 70.7 points or 1.3 per cent to 5,267.6.
‘A year and a half ago there maybe was a risk of a domino effect,’ De Gucht told Belgium’s Dutch-language newspaper De Standaard, in comments confirmed by a person close to him.
‘But today there are in the European Central Bank, as well as in the Commission, services working on emergency scenarios if Greece shouldn’t make it. A Greek exit does not mean the end of the euro, as some claim.’
Speculation about such planning has been rife, but de Gucht’s comments appeared to be the first time an EU official has acknowledged the existence of contingencies being drawn up.
A German finance ministry spokeswoman, asked about plans for a possible Greek exit, said, without elaborating: ‘The German government naturally has the responsibility to its citizens to be prepared for any eventuality.’
Confidence in European banks was drastically undermined last night when Moody’s downgraded 16 Spanish institutions, Santander’s huge UK operation among them.
That raised the spectre of panic withdrawals at the UK arm of the Spanish bank, similar to those last seen when Northern Rock went under in 2008.
The shock downgrade compounds fears of a new financial crisis in Britain being precipitated by a messy Greek exit from the eurozone.
Nearly £200billion has been wiped off the value of FTSE shares in the past two months, and in the past fortnight the collective pension deficits of Britain’s biggest listed companies have spiralled by £30billion thanks to the market slump.
The UK’s big High Street banks have massive exposure to the eurozone and their shares are down nearly 30 per cent over the last three months. Lloyds Banking Group is 1 per cent down today.
Furthermore, hundreds of UK institutions that have lent on the interbank market to Santander could be rocked if the Spanish lender becomes a victim of the worsening single currency disaster.
With another ratings agency rubbishing Greek sovereign debt even further fears emerged that Greek and Spanish citizens could soon start to pull cash from their bank deposits en masse.
Persistent rumours of spiralling withdrawals have been denied by authorities on the Continent, but traders were still gripped by the ongoing crisis.
‘With sentiment towards risk assets already extremely fragile, the prospect of a run on the banks is hardly helpful,’ said Ian Williams, equity analyst at Peel Hunt.
The markets in Paris and Frankfurt were both 0.5 per cent down while the euro had recovered slightly from a four-month low of $1.264.
’European markets are still in a very fatalistic mood because of Greece and possible contagion,’ said Lex van Dam, hedge fund manager at Hampstead Capital.
‘My view is that it is very likely that the European Central Bank will step in before the situation spirals out of control, which will support the markets.’
Spain’s financial stability was doubly shaken yesterday when its borrowing costs soared to near-unsustainable levels.
Scared: This graph shows how Spain has had more withdrawals from its banks than any other eurozone country since last January
Currency traders said the euro would remain extremely vulnerable to further bad news out of the eurozone, and looked set to test the 2012 low of $1.262.
Below that would take the euro to its weakest level versus the dollar since August 2010.
‘If it’s not Greece, it’s Spain that we talk about to sell the euro. People are looking for bad news and they are concerned there appears to be no solution for the situation,’ said Lutz Karpowitz, currency analyst at Commerzbank.
With little prospect of a resolution to Greece’s political stasis – never mind to the wider financial malaise – in sight, David Cameron and George Osborne were piling pressure on Germany to foot the bill.
Prime Minister suggested the eurozone needed to raise money by issuing ‘eurobonds’ – collective debts – if it wanted to save the single currency, while the Chancellor insisted Germany and other rich countries needed to ‘share the burden’.
Mr Osborne told MPs the Government would be ‘prepared for whatever comes’ in the event of a Greek exit from the euro, adding: ‘We are making the necessary contingency plans.’
Downing Street revealed that the National Security Council has discussed the likely fallout from a break-up of the single currency, including the potential for civil strife.
Last night Mr Cameron held video conference talks on the crisis with German chancellor Angela Merkel; France’s new president, Francois Hollande; Italian prime minister Mario Monti; Herman Van Rompuy, president of the European Council; and Jose Manuel Barroso, president of the EU Commission.
Amid signs of increasingly bitter divisions on the Continent, Alexis Tsipras, head of Syriza, an extreme Left-wing Greek political party that opposes austerity measures, warned the EU was ‘going directly to hell’.
Earlier, Mr Cameron admitted he ‘cannot predict’ how the eurozone crisis will end.
‘I cannot pretend that Britain will be immune from the consequences, either,’ he said. ‘But this I can promise: that we know what needs to be done and we are doing it. Get the deficit under control, get the foundations for recovery in place, defend the long-term interests of our control and hold our course.’
The Prime Minister risked infuriating EU leaders by talking freely about the possibility of the break-up of the euro.
Earlier this week, Mr Osborne warned that ‘open speculation’ about the future of eurozone members was damaging, but on Wednesday he said: ‘When eurozone central bank governors and finance ministers openly speculate on the possibility of Greek exit then the genie is out of the bottle.’
Mr Cameron said that the ‘long-term consequences’ of any single currency were richer areas paying to support poorer ones. ‘In Britain, we have had one for centuries. When one part of the country struggles, other parts step forward to help. There is a remorseless logic to it,’ he added.
The Prime Minister warned of ‘perilous economic times’ as he pledged to use spending cuts to ‘keep Britain safe from the storm’ that economists say could be the start of a decade-long depression.
The stark comments put Britain on a collision course with new French president Francois Hollande who has promised voters yet more spending – despite debt levels spiraling out of control.