Under a caretaker government that can take no action toward fulfilling Greece’s obligations under the terms of its newest bailout, the country waited as people withdrew savings from banks in fear that a departure from the euro could destroy their savings.
So many people have done so since Monday that on Wednesday the European Central Bank (ECB) cut off funding to four Greek banks that it did not consider solvent, and that action roiled markets—as did ECB President Mario Draghi’s assertion that the central bank would not compromise its principles to keep Athens a part of the joint currency.
Reuters reported Thursday that, although senior judge Panagiotis Pikrammenos was sworn in as interim prime minister on Wednesday, there is not much he can do beyond overseeing the country as it moves toward new elections on June 17. No negotiations are taking place with Greece’s creditors, since none have been authorized for the outgoing cabinet ministers.
Many actions designed to meet bailout guidelines have been suspended, some before the May 6 election that left the country in turmoil, as politicians sought not to further alienate voters, and others since the election because of lack of authority to act.
Yet without those measures proceeding, Greece has no way to satisfy the troika of E.U., ECB and International Monetary Fund (IMF) officials who will decide when—and whether—to release further funding.
And Greece is running out of money. Weak tax collection measures coupled with a bank capitalization plan that is in suspension mean little money is flowing into the country’s coffers—and Greece’s people have been pulling their money out of its banks at such a pace that the ECB rated the four banks it will no longer deal with as negatively capitalized.
The troika has announced that it will not return to Greece until a new government is in place and its ministers have reviewed the country’s finances and taken action on policies.
On Wednesday, Draghi said in a speech that the ECB’s “strong preference” is for Greece to remain in the euro zone, but that it will act to maintain “the integrity of our balance sheet.” The ECB issued a statement that said it would push some Greek banks to seek financing from the Greek central bank rather than the coffers of the ECB. The statement said in part, “Once the recapitalization process is finalized, and we expect this to be finalized soon, the banks will regain access to standard Eurosystem refinancing operations.”
Worries over the fate of Greece and the euro are not helped by Spain’s current difficulties. Reuters reported Thursday that the country has officially slipped into recession, as figures showed its economy contracted in Q1 by 0.3% from Q4 of 2011. Year on year it is down 0.4%, according to its National Statistics Institute, and that is its sharpest fall since Q1 of 2010. Spain’s manufacturing sector contracted at its fastest pace in almost three years in April; its service industry saw its 10th straight month of decline, according to purchasing managers’ indices (PMI) from Markit. Amid the gloom, yields on the country’s 10-year bonds hit a five-month high of 6.5% on Wednesday.
Bloomberg reported that Prime Minister Mariano Rajoy was set to implement new powers to cut debt in several of Spain’s most troubled regions at a budget meeting on Thursday, even as the region of Valencia struggles to avoid default without outside intervention.
Regional debt beyond the control of the central government has gotten Spain into trouble, and according to a law passed last month, if budgets presented at Thursday’s meeting fail within nine months to meet national policies, the government will have the ability to require cuts and tax increases.
In Britain, Prime Minister David Cameron was set to rile European officials as he was scheduled to present a speech in which he would push officials in the euro zone to “sort out its problems.” Cameron also planned to say that he would do whatever he had to in order to protect the economy and banks of Britain from a euro zone breakup.
In exerpts from the speech that were released in advance, Cameron was to say, “Either Europe has a committed, stable, successful euro zone with an effective firewall, well-capitalized and regulated banks, a system of fiscal burden sharing, and supportive monetary policy—or we are in uncharted territory which carries huge risks for everybody.”
Euro zone leaders would likely be irked by his statement, “As I have consistently said, it is in Britain’s interest for the euro zone to sort out its problems. But be in no doubt: whichever path is chosen, I am prepared to do whatever is necessary to protect this country and secure our economy and financial system.” On Wednesday the Bank of England said it had been planning for some time for a potential breakup of the euro zone, with an eye toward how banks could protect themselves.
Despite the swelling wave of anti-austerity sentiment throughout Europe, Cameron was also planning to hold firm on his own austerity plans for Britain, and says in the exerpt, “We must resist dangerous voices calling on us to retreat.”