The newly elected French president, Francois Hollande, met with Chancellor Angela Merkel of Germany to discuss the possibility of growth measures as they sought a way out of the Greek debt debacle. Markets reacted to the failure of Athens to form a government amid open discussion of the possibility that the country may depart the euro.
Bloomberg reported Wednesday that Hollande’s first meeting with Merkel resulted in a declaration that growth measures would be considered for Greece as long as that country remained committed to the austerity measures that are a condition for its second bailout.
“I’ll respect the vote of the Greeks whatever it is,” Hollande was quoted saying. “Yet my responsibility is to give Greece a signal. I see the suffering and challenges that the Greeks feel. The Greeks need to know we’ll come with growth measures that will allow them to stay in the euro zone.”
Merkel has been adamantly opposed to any leeway in austerity, while Hollande won the French presidency on a platform of growth in addition to austerity. She took care to bring up the fact that Greece and its creditors had agreed on the bailout program, and that it “has to be adhered to.”
The likelihood of Greece honoring those austerity requirements has been diminishing by the day, as first voters punished the parties that had accepted them and now anti-austerity parties look poised to win new elections that could be called as early as June 10 but could be set instead for June 17.
After talks failed on Tuesday to produce a new government, President Karolos Papoulias of Greece was scheduled to meet with party leaders on Wednesday to discuss forming a caretaker government. The BBC reported that Papoulias was expected to name a senior judge to preside over the running of the country until new elections are held.
Markets took a dim view of the proceedings, with the euro and stocks from Europe to Asia falling on concerns that the situation would end badly. Greek citizens, also anticipating problems, withdrew near-record amounts of euros from the country’s banks—something they also did prior to the country’s first bailout.
Bloomberg reported that the head of Greece’s central bank, George Provopoulos, said that at least at least 700 million euros ($894 million) were pulled from banks on Monday. The report said that according to two banks, Tuesday’s withdrawals ran at about the same pace.
According to the minutes of a meeting with political leaders on Tuesday, Papoulias told them about the withdrawals. He was quoted saying, "Mr Provopoulos told me there was no panic, but there was great fear that could develop into a panic."
He added, "Withdrawals and outflows by 4:00 p.m. when I called him exceeded 600 million euros and reached 700 million euros. He expects total outflows of about 800 million euros, including conversions in German Bunds and other such things."
A senior bank executive cited in the report said that, while there was no sign of panic, there had been withdrawals in a manner similar to April 2010, when 8 billion euros were withdrawn from Greek banks just before the country was granted its first bailout. Worries over a possible return to the drachma have caused people to fear that their savings would be destroyed.
Central bank figures showed that Greek businesses and households had 165 billion euros on deposit at the end of March, and had withdrawn 72 billion euros since January 2010. According to experts, part of the withdrawals were because of capital flight, while the need to use savings to meet expenses during the financial crisis accounted for another chunk.
On Tuesday, Christine Lagarde, head of the International Monetary Fund (IMF), brought up the possibility of an “orderly exit” from the joint currency for Athens. She was quoted saying, "It is something that would be extremely expensive and would pose great risks, but it is part of options that we must technically consider."
Hollande has said that the European budget treaty, into which Germany has had so much input, should be renegotiated. He has also said he wants “growth aspects to be real and translatable into reality.” At a June summit meeting of euro zone leaders, he added, “everything needs to be put on the table,” including investment spending and joint euro-area bonds. Merkel has firmly opposed the possibility of euro bonds.
She did, however, say that she had called both New Democracy leader Antonis Samaras of Greece, whose party won the May 6 vote, and caretaker Prime Minister Lucas Papademos to tell them “that we are prepared to help Greece overcome its structural challenges, to help with growth.”
Even as many countries in the euro zone are rebelling against austerity measures that thus far have failed to produce the desired results, Prime Minister Mariano Rajoy of Spain is pushing the Spanish Parliament to honor its own austerity commitments.
As worries over the possibility of a Greek exit from the euro raised yields on Italian and Spanish bonds, Rajoy told Parliament that a failure to keep to budget cuts could shut the country out of financial markets. He was quoted saying, “There is a serious risk that they don’t lend to us or that they lend to us at astronomical prices. All the measures we are currently taking are to lift us out of a pit.”