Greece’s future in the euro continues to look grim after the country has failed to create a new government bank withdrawals are on the rise.
On Monday, depositors took out EUR700 million ($898 million) from their local banks. In response to the withdrawals, Greek President Karolos Papoulias told party leaders on Tuesday that Greece’s lenders are facing a difficult situation and that “the strength of banks is very weak right now” reported The Wall Street Journal.
The recent outflow of money hasn’t evolved into a full-blown crisis; help could come from European Central Bank (ECB) with its large capacity to infuse banks with liquidity. But a run of the banks could cause problems if Greece citizens worry that the country will get rid of the euro and subsequently their savings would be gone.
An exit for the euro could also happen if Greece freezes bank accounts and creates their own currency to keep things going.
And in another possible situation, should Greece not comply without bailout conditions, the ECB would pull their liquidity to banks; this could result in a collapse of the banking system.
This is just one of many of Greece’s problems.
No Government Coalition Agreement
Other concerns for the country includes Greece’s political parties failing to agree on a government coalition during the last week; the country will be in a standstill until June’s elections. This could bring a rise in Greece’s economic woes and much-needed international aid, according to The Wall Street Journal.
On Wednesday, party leaders planned to meet and appoint a government that will take the country to the election, which is looking like a June 17 date. This comes after the May 6 election that crushed Greece’s mainstream parties. With the country’s increasing problems, many believe that parties opposed to austerity measures will rise.
Opinion polls show that the new election could produce a divided parliament. In addition, Greece won’t have time for talks as it must provide details by the end June that will put together the EUR 11.5 billion budget gap.
Europe’s Leaders Are Challenged
In addition to Greece’s difficulties, Europe’s leaders are in a tough place. The hope had been for the recent elections to create a consensus but instead, the result showed Greece’s continued unhappiness with the current measures.
Senior European policy makers has downplayed a potential Greece exit from the euro zone but the marketplace isn’t agreeing. Should Greece leave, investors could begin questioning the euro in other challenged countries including Spain and Italy. The remainder of Europe would need to step up and keep the euro from tanking.
Here at Valuewalk, we predicted the Southern Europe bank run back in December.
International Monetary Fund chief Christine Lagarde recently told a French television station, The spillover effects, the chain of consequences that could result from that are very difficult to assess. We can certainly assume that it would be quite messy.”
The political arena for Greece to dodge a euro exit is getting smaller. The Greek parties’ demands for renegotiating its international bailout conflicts with Germany and other creditors concessions likely to come its way.
These countries are demanding that Greece decided now on whether or not go with additional austerity or consider a cut off of aid; this could result in an exit from the euro zone.
On Tuesday, the failed Greece coalition talks rattled the euro-zone bond markets, increasing yields on Spanish (6.37 percent) and Italian government bonds.
The euro dropped to $1.2763 late Tuesday, down from Monday’s $1.28.