Crisis talks as Europe plans £40bn Greek exit

GREECE’S membership of the euro was pushed further towards the precipice last night as other eurozone members were told to prepare for an “amiable divorce”, in a move that could tip Britain deeper into recession.

As European Union leaders met in Brussels still divided over how to resolve the crisis, it emerged yesterday that each of the eurozone nations agreed on Monday to pull together individual contingency plans for a €50 billion “Grexit” – the first time such co-ordinated action has been deemed necessary.

And in a high-stakes game of brinkmanship, Germany’s central bank, the Bundesbank, said yesterday a “manageable” Greek exit from the euro would be better than any dilution of its austerity measures, and giving it more money.

The move appeared to be designed to snuff out any belief in Greece that it could force Germany to relent on cutbacks by threatening to pull out of the euro.

EU leaders spent a three-hour dinner last night discussing the growing crisis, with France and Britain both supporting moves to create “eurobonds” to allow the stricken southern European countries to borrow at the same rate as Germany.

Arriving in Brussels, David Cameron said the EU needed a “decisive plan” to deal with the Greek crisis, and that the eurozone needed to “get behind the single currency” to ensure it was stable.

But the hardening German position looks set to thwart any plan for a compromise on Greece, raising the prospect of a Greek exit higher up the agenda.

Economists and politicians in the UK have warned repeatedly such a crisis would be perilous for the UK economy, potentially triggering a collapse in confidence in weak EU banks.

They say it could lead to another “credit crunch”, starving the economy of much-needed funds as it seeks to recover from recession.

The political deadlock, ahead of Greece’s 17 June election, saw the FTSE 100 stock market plunge by more than 2 per cent, mirroring falls in stock markets across the world.

Amid signs that the crisis could unravel across the continent, Spain’s prime minister, Mariano Rajoy, warned that his country could not survive much longer paying the current high borrowing rates imposed upon it as a result of the uncertainty.

He said the European Central Bank needed to recommence the emergency measures it put in place before Christmas, when it bought up billions of pounds worth of bonds from the southern European countries, helping to reduce their borrowing costs.

French president François Hollande said “the top priority” was to inject funding into the European financial system “to ensure that European banks, all European banks, can be consolidated”.

All eyes will now turn to the Greek elections. Mr Cameron has already warned that a vote for its anti-austerity parties would be tantamount to a vote against membership of the euro.

That eventuality is now being planned for, according to reports from Brussels yesterday. On Monday, officials from the eurozone nations agreed they all needed to put in place contingency plans to prepare for the Greek exit.

The decision was taken by the Eurogroup Working Group (EWG), which consists of officials who prepare meetings for the eurozone’s finance ministers.

“The EWG agreed that each eurozone country should prepare a contingency plan, individually, for the potential consequences of a Greek exit from the euro,” said one eurozone official. “Nothing was prepared so far on the eurozone level for now, for fear of leaks.”

Reports said that documents described a plan for an “amiable divorce”, under which the EU and IMF would give Greece up to €50bn to mitigate chaos that would be caused by a return to the Greek drachma.

On the impact to the rest of the eurozone, a report by one of the officials in the talks noted: “The markets will definitively distrust the euro.”

Yet, in an explosive intervention yesterday, the Bundesbank appeared to concede that this was preferable to any weakening of the position towards Greece.

“Greece is threatening not to implement the reform and consolidation measures that were agreed in return for the large-scale aid programmes,” it said. “This jeopardises the continued provision of assistance. Greece would have to bear the consequences of such a scenario.”

The spectre of a Greek exit was also raised by former Greek prime minister Lucas Papademos yesterday, who admitted the government might be making preparations for leaving the single currency.

Reports in the Greek press suggested it could take the form of a weekend departure, with police manning the borders, and euros stamped red to denote they were now Greek currency.

Leaders who discussed the crisis at an informal dinner last night said the talks were not intended to come forward with any firm new proposals. That is likely to come at another summit at the end of June, after Greek elections had taken place.

However, leaders across the continent stressed last night that time was running out.

Mr Rajoy said: “Europe has to come up with an answer. It is a must, because we cannot go on like this for a long time, with large differences when it comes to financing ourselves.”

Mr Rajoy said the European Central Bank now needed to kick-start fresh emergency measures, such as buying up the bonds of weak countries, thereby cutting their borrowing costs.

Pressure is rising on European leaders to agree to new growth measures to complement the budget cuts. Both the International Monetary Fund (IMF) and the Organisation for Economic Co-operation and Development (OECD) have said the pace of austerity measures should be slowed in some countries to lower the risk of a severe recession.

But the eurozone paymasters in Germany insist that any weakening of the position towards Greece cannot be considered, or it will imperil any confidence in the continent’s ability to reduce its massive debt burden.

German foreign minister Guido Westerwelle said: “Anyone who wants new flash-in-the-pan stimulus packages financed by yet more borrowing has learnt absolutely nothing from this crisis.

“The EU must use its resources better without spending more.”