Posts tagged "greece"

Greek crisis: what happens next?

A new election looms, with the possible reintroduction of the drachma to follow

How would Greece leave the eurozone?

Greeks go to the polls again on 17 June after the vote on 6 May proved inclusive. The new election is seen as a referendum on the euro. If the anti-austerity Syriza party wins control and cannot force Germany to relax its opposition to lower and slower cuts, there may be no option but for Greece to leave the eurozone – or be kicked out.

So it’s down to democracy then?

Not quite. If outflows from the Greek banks continue at this current pace then the instability could force Greece out of the eurozone before the election.

What would happen if Greece left?

It would have to be carried out almost overnight – most likely over a weekend. The banks would have to shut their doors, bank accounts would be frozen and capital controls imposed to stop any more money leaving the country. The new currency would be likely to lose at least 50% of its value relative to the euro so any saver in Greece who has left their money in a bank will instantly find it is worth considerably less. Opinion polls show that while Greeks do not want austerity, most of them want to stay in the euro – which explains why savings are still sitting in Greek banks.

What will the new drachma look like?

Unless a load of forgotten drachma are found in a vault, Greece will need to print a new currency. It is possible that the authorities have thought ahead as Slovakia did when it split from Czechoslovakia in 1993, printing a new currency and hiding it away in London until it was needed. A more likely option could involve tweaking euros already in circulation in Greece. Some suggest a D could be emblazoned across euros, while others suggest corners could be clipped off. It would also need a new symbol for currency traders on the money markets. Before the euro, the drachma was known as GRD and by the numeric symbol 300 for international trading. The financial markets – and their computers – would need a new symbol for the currency quickly so that it could be traded.

Would it only have an impact in Greece?

The key question and hardest to answer. It could cause mayhem, just as the collapse of Lehman Bros did in 2008: sparking a wave of market panic and the biggest global recession since the 1930s. Marchel Alexandrovich, of Jefferies International, is so concerned that he reckons Greece should be “persuaded and paid to stay in the euro, which would much cheaper than the alternative”.

Incoming search terms:

• what happens if syriza wins election

Austerity will send Greece to hell, warns Alexis Tsipras

Syriza leader’s claims countered by Antonis Samaras, who says Greek government must not abandon reforms or quit euro

The two main figures in what promises to be Greece’s most electric election in living memory were on a collision course on Thursday, with one predicting “hell” if Athens adheres to EU-mandated austerity and the other forecasting a “nightmare” if the nation abandons reforms and gives up the euro.

Emboldened by yet another poll showing his party’s wide appeal, the leftwing Syriza leader, Alexis Tsipras, said the international accord that Greece had signed up to in return for rescue loans was catastrophic for the country. Instead of a rescue, the debt-stricken nation has been thrown into its worst recession since the second world war.

“With this policy [bailout agreement] we are going directly to hell,” he told CNN. “To save Europe we need to change direction,” insisted the politician who has pledged to “tear up” the €130bn (£104bn) “memorandum of understanding” that Athens reached with the EU and IMF earlier this year.

The 38-year-old, who has sent shockwaves through EU capitals with his fiery anti-austerity rhetoric, made the remarks as Syriza announced that he would be visiting Berlin and Paris next week for talks. It was unclear whom Tsipras would be meeting, although aides said the German chancellor, Angela Merkel, would not be among those lined up.

Within hours, the leading credit agency Fitch had downgraded Greece’s sovereign rating to CCC from B-, citing “the risk of a Greek exit from European Monetary Union … in the near term”.

Earlier in the day, Antonis Samaras, who heads the conservative New Democracy party, painted a very different picture in a speech that conjured images of a living hell if Athens quit the EU.

In the event of the debt-stricken country reneging on the pledges it had made, the road ahead would be a “nightmarish” one, he said.

Reversion to the drachma would mean wages, deposits and property values all being “cut in half”, and the price of imported commodities, such as food and fuel, skyrocketing, he predicted. “This is the nightmare that those who speak of a unilateral condemnation [of the loan agreement] will bring,” he told his parliamentary group at its last meeting before the 300-seat house is dissolved and the election campaign officially announced .

“The battle that begins the day after tomorrow for the new elections is not about any single party or its electoral influence,” said the 61-year-old politician, ashen-faced as he delivered the speech. “It’s about whether Greece will remain in Europe, a Europe which is itself changing. Or if Greece will be found to leave Europe, losing much and risking even more.”

New Democracy, he said, would form the core of the “front of resistance against catastrophe”.

After handing over to his successor, Panagiotis Pikramenos, a high court judge whose caretaker government will lead Greece to elections on 17 June, the outgoing prime minister, Lucas Papademos, also stepped into the fray.

The former central banker, who headed an emergency left-right “salvation government” that secured the EU-IMF sponsored deal, said he feared that sacrifices Greeks had made in the form of tax increases and pay and pension cuts would be lost if voters decided to back anti-austerity parties at the ballot box next month.

Greeks had endured the punitive cutbacks to put the economy back on track through fiscal consolidation, he said.

“The Greek people’s sacrifices were not an ‘empty shirt’,” said Papademos in an open letter to the nation, his last act before leaving office.

“Unilaterally renouncing the country’s loan agreement would be disastrous for Greece, as it would inevitably lead the country out of the euro, and possibly out of the European Union,” he wrote. “There are those who are waiting to benefit from the chaos that will follow the humbling exit of the country from the common currency.”

Next month’s poll follows an inconclusive election on 6 May which ushered in the rise of “anti-bailout” groups such as Syriza – the vote’s surprise runner-up – and decimated “pro-bailout” parties such as New Democracy and the socialist Pasok.

Speaking to the Guardian, senior Syriza officials insisted that the party, which polls suggest is poised to emerge as the biggest political force, had “no intention” of unilaterally revoking the accord.

“Austerity is over in this country and it’s the end of the memorandum of understanding,” said Takis Pavlopoulos, one of Tsipras’s top aides, referring to the accord. “You have to be a neo-liberal fanatic not to see that it [austerity] has failed,” he added, pointing out the record levels of unemployment and deepening poverty engulfing Greece. “But we will not proceed with any unilateral action that might question Greece’s membership of the eurozone.”

Greece, he said, had been among the original member states to sign up to the then EEC. As such, Athens was also a “co-owner” of the project and could not be ejected from a union it had participated in for over 30 years.

“Destructive austerity was not part of the deal for any member state to enter the eurozone. No one has the right to say ‘either you accept austerity or leave’,” added the US-trained economist.

Policymakers have claimed that renouncing the loan agreement will lead not only to a disorderly default – with ensuing chaos taking hold of a country whose economy is already on its knees – but possibly to the breakup of the 17-nation bloc.

Syriza argues that such claims are a high-stakes bluff aimed at safeguarding the status quo. Euro–exit fears were not reverberating around the corridors of the European parliament, insisted Nikolaos Chountis, the party’s sole Euro-MP.

“There are other voices that you hear that are very ambivalent about the policies being pursued in the name of resolving this crisis,” the MEP said. “And there are other countries that are in a very difficult position like Portugal and Ireland. All this scaremongering that is peddled here about Greece facing a living hell just doesn’t exist in Brussels.”

Fears that Greece would not have enough money to even pay public sector pay and pensions in the event of loans drying up were simply not true, said Panaghiotis Lafazanis, another Syriza MP. “The loans basically cover interest payments,” he said.

“They [the Europeans] can’t kick us out. The memorandum is not part of the eurozone institutional framework. It is a political choice that has been deligitimised by popular vote.”

Eurozone crisis live: Fitch downgrades Greece on euro exit fears

• Fitch cuts Greece to CCC
• Bankia chairman denies reports of bank run
• El Mundo: €1bn taken out since Bankia nationalisation
• Markets fall again
• Spanish bond yields jump at auction
• Vince Cable: Germany can solve the crisis

7.48pm: It’s been a tough day for Greece — with those rumours (officially denied) of a run at Bankia, the higher borrowing costs seen at this morning’s auction of sovereign debt, the IBEX closing at a new nine-year low, the regional downgrades from Moody’s, and confirmation that it’s in recession.

And in a few minutes, we fear Moody’s will also announce that it has downgraded some Spanish banks…..

7.10pm: Fitch’s downgrade of Greece came as I was digesting two opinion polls from Athens.

The latest MARC/Alpha survey, which was conducted between Tuesday and today, put New Democracy (which broadly supports the terms of Greece’s financial programme) back in the lead, closely followed by Syriza (which has vowed to reshape it).
New Democracy: 26.1% of the vote
Syriza: 23.7%
Pasok: 13.2%

That, according to Bloomberg, would give New Democracy 123 seats (including the 50-seat bonus for coming first), followed by 66 for Syriza and 41 for Pasok. So the two “mainstream” parties could then form a majority in the 300-seat parliament.

However, a different poll carried out by the Pulse polling group (see bar chart) found that Syriza was the most popular:

Syriza: 22%
New Democracy: 19.5%,
PASOK: 14%,
KKE Communist Party: 5.5%
Democratic Left: 5.5%
Golden Dawn: 5.5%

6.47pm: Fitch has also warned that it would put all eurozone sovereign ratings on rating watch negative following the Greek elections if it believes a Greek exit from the eurozone has become “probable”.

That would be the first step towards credit rating downgrades. As things stand, only four eurozone countries still hold AAA ratings with all three major rating agencies, while others have already suffered several rating cuts since the crisis began.

Tonight’s statement also shows that Fitch have cut Greece’s “country ceiling to just B-” That, I think, means that no bond issuer based in Greece can have a higher rating….

Business Insider have now helpfully uploaded the whole statement.

6.36pm: Big breaking news tonight — Fitch has just downgraded Greece, warning that it could soon crash out of the single currency.

The rating agency cut Greece’s long-term rating to CCC, from B-, just two months after upgrading its rating following its debt swap deal.

Fitch said it had taken the move because of the chance that the next Greek government will be led by parties who oppose the current austerity plan.

In a statement, Fitch said

The downgrade of Greece’s sovereign ratings reflects the heightened risk that Greece may not be able to sustain its membership of Economic and Monetary Union (EMU).

The strong showing of ‘anti-austerity’ parties in the 6 May parliamentary elections and subsequent failure to form a government underscores the lack of public and political support for the EU-IMF EUR €173bn programme.

In the event that the new general elections scheduled for 17 June fail to produce a government with a mandate to continue with the EU-IMF programme of fiscal austerity and structural reform, an exit of Greece from EMU would be probable.

Fitch went on to warn that a Greek exit would likely result in widespread default on bonds issued by Greek companies, as well as its own sovereigh debt.

6.19pm: On Wall Street, the main stock indices have fallen again today. That’s partly due to fears over the eurocrisis, and partly the weak economic data released today (see 3.06pm). The Dow Jones is currently down 46 points at 12551, a fall of 0.4%, with the S&P 500 down 0.6%.

That puts the S&P on track for its fifth daily loss in a row.

Brad Sorensen, director of market and sector analysis at Charles Schwab in Denver, told Reuters tonight:

Europe continues to drive sentiment, and it continues to be negative, while in addition today’s data was mediocre overall. That’s causing people to take risk off the table.

6.06pm: Some breaking news on Spain — Moody’s has just announced that it has downgraded four Spanish regions: Catalunya, Murcia, Andaluca, and Extremadura.

It confirmed its ratings on two other regions – Valencia, and Castilla-la Mancha.

Moody’s said it had taken the decision because it believes there is little chance that authorities in these areas will hit their deficit goals. That’s worrying – Spain missed its overall deficit target in 2011 because its regions borrowed too much.

The move comes as speculation grows that Moody’s will downgrade as many as 21 Spanish banks tonight. According to the FT’s fine Alphaville blog, the downgrade is definitely coming, and it’s going to be big….

5.39pm: Nearly £190bn has been wiped off the value of leading shares on the London Stock Exchange since markets began to take fright over a potential Greek exit from the euro, two months ago.

My colleague Patrick Collinson has crunched the numbers, and reports:

In the eight weeks since the FTSE peaked on March 16, the market has fallen by 10.4%, including today’s 1.24% drop. The FTSE100 has plummeted from 5965 to 5338, while the All Share index has slumped from 3098 to 2776, according to FTSE Group.

The scale of the fall means it is now an official ‘market correction’, which is defined as a fall of 10% or more in a relatively short space of time.

4.56pm: Alistair Darling, the former UK chancellor of the exchequer, has blasted Europe’s leaders for wasting the last two years, and warned that the crisis could blow up in just a few hours.

Speaking on Sky News, Darling said EU politicians must realise that:

If you don’t get growth, you don’t get deficits down. It’s common sense. We had this debate seventy five years ago.

Darling, who was UK finance minister between June 2007 and May 2010, warned that the world economy simply couldn’t cope with another banking crisis, saying that confidence was “desperately needed”

From my own experience these things can blow up in a matter of hours. The slow bleeding of Greek banks should worry everyone.

Europe for the last two years has been running round like headless chickens. It’s no wonder people now think things will go wrong.

4.39pm: European stock markets have closed in the red again, after another day dominated by fears over the eurozone.

FTSE 100: down 66 points at 5338, – 1.24%
DAX: down 67 points at 6316, -1.06%
CAC: down 32 points at 3016, -1.07%
IBEX: down 73 points at 6537, -1.11%
FTSE MIB: down 194 points at 12089, -1.46%

Fears over Bankia’s future saw its shares close 13% lower, despite the official denials that it was suffering a bank run.

The Stoxx 600 Euro Zone banking index, which includes financial stocks from across the single currency, fell by 2.6% to its lowest ever closing level. That reflects speculation that Moody’s will downgrade a swathe of Spanish banks at 8pm BST tonight…

4.19pm: With stock markets heading into the close after another day of losses, it has been calculated that the collective pension deficits of Britain’s biggest listed companies has swelled by £30bn in the past fortnight.

Actuaries at Towers Watson have, according to the Daily Telegraph, worked out that total deficits in FTSE350 companies’ pension funds have increased from £62bn at the end of April to £92bn yesterday.

Most of the damage was caused by falling yields on government bonds such as UK gilts and German bunds, rather than the drop in share prices. Lower bond yields mean that pension funds must calculate that they will earn less from holding sovereign debt, which is why pensions groups really dislike quantitative easing.

4.02pm: Following today’s denials from Bankia, City analysts are warning this afternoon that Europe could see bank runs in earnest unless progress is made to resolve the crisis.

Capital Economics pointed to reports of deposit outflows in Greece, saying:

Concerns are growing that bank runs could soon become a regular feature in other troubled countries in the region deemed at risk of following Greece’s lead.

The recent rapid decline in Greek bank deposits underlines our warnings that it could be market pressures exerted through the banking system which prompt some form of euro-zone break-up.

This graph shows how Greek bank deposits have been falling for months.

With the euro bobbing around the $1.27 mark, and shares down in Europe, CMC Markets’ Michael Hewson compared the markets to the Vortex rollercoaster at the Thorpe Park theme park:

Talk of bank runs in Europe clobbered banking shares across Europe with Bankia in Spain gyrating wildly lower. Reports that ratings agency Moody’s is considering downgrading 21 Spanish banks has also weighed on sentiment as the Spanish IBEX hit fresh nine year lows, as economic data confirmed that the country was back in recession.

UK banks also got caught up in the backdraft with Royal Bank of Scotland and Barclays the biggest losers in UK markets.

3.38pm: Greece can look forward to a visit from the International Monetary Fund after next month’s election.

David Hawley, the IMF’s deputy director of external affairs, told reporters in Washington that officials were very keen to meet Greece’s next government, and review progress made against the targets set by the Troika as part of its €130bn bailout.

3.16pm: EC president José Manual Barroso has told the United Nations that Europe will do whatever it takes to help keep Greece within the eurozone.

In prepared remarks running on Reuters, Barroso told the UN General Assembly that the EU will meet its obligations, and that Greece must do the same. Here’s a flavour:

As far as Greece is concerned, I would like to reaffirm very clearly that we want Greece to stay in the euro area. And the European Union will do all it takes to ensure it.

Barroso also sent a signal to Greece’s leaders, as the new general election campaign gets underway.

We will honour our commitments toward Greece and we expect the Greek government – current and future – to fulfill jointly agreed conditions for financial assistance.

3.06pm: Some disappointing data from America has just knocked market confidence, and suggested that the US economic recovery is faltering.

The Philadelphia Fed business conditions survey was weaker than expected, coming in at -5.8 for May. That suggests US business leaders in the Philadelphia region are seeing tougher conditions.

Seperately, the Confidence Board’s Leading Economic Index (a measure of future economic activity), fell in April for the first time in seven months.

2.46pm: Stuart Gulliver, chief executive of banking giant HSBC, has told the Guardian that the crisis has intensified over the last week, and that a firewall would need to be put around Spain if Greece leaves the euro.

Jill Treanor, our banking expert, reports:

A week ago, when Stuart Gulliver was asked about whether Greece would stay in the eurozone he said it was “impossible” to tell. Asked again today, he said “We’re in a worse place than we were a week ago”.

“It remains a very difficult thing to call. I think the second election in June will be be a referendum on whether to stay in the euro. A month is a very long way away,” he said.

“We are now seeing price action that is consistent with capitulation,” said Gulliver. And if Greece decides to exit the eurozone, he believes an firewall will need to put around Spain. “We need to take Spain out of the market,” he said.

HSBC has a bank in Greece with 16 branches and he said there were no particular signs of inflows or outflows. Asked it if was logical for Greeks to keep their money in banks if the county was going to leave the euro, he said it was: “if you believe the polls that show 75% of the electorate want to stay in the eurozone but don’t support the austerity”.

But, he added, that if there was a run on Greece banks it might not be possible to wait for the elections on June 17.

2.33pm: Our Madrid correspondent Giles Tremlett has full details on Bankia’s denial of a bank run:

In the note, published by the Comisión Nacional del Mercado de Valores as “price sensitive information”, Bankia said that operations in its branches “have been within the normal parameters”, adding:

The evolution of deposits in the first fortnight of May has a highly seasonal nature

However, there is no mention of the €1bn euros that El Mundo newspaper said had been pulled out of the bank over the past week.

Bankia also expected that “the level of deposits will not suffer any major changes over the coming days.”

The bank went on to remind clients that the governmnent had said they would not suffer because of the nationalisation and that the Bank of Spain said last week that Bankia was solvent and functioning normally.

Shares are now “only” 11% down on the start of day price.

2.05pm: Breaking news: Spain’s Bankia has called on savers to remain calm. The bank has responded to today’s reports that more than €1bn of funds had flowed out of the company in recent days.

Bankia issued a statement to the Madrid stock market in the last few minutes. In it, new chairman Jose Ignacio Goirigolzarri said:

Bankia’s clients can be absolutely calm about the security of the the savings they have deposited

So, a clear signal that a bank run is not taking place.

1.26pm: It appears that Spain’s economy minister Fernando Jimenez Latorre has calmed the worst of the crisis by insisting that Bankia was not suffering from an outflow of deposits (see 12.54pm)

Shares in Bankia have struggled back a bit, now down 13.6% at €1.43. Still a hefty fall.

1.08pm: Today’s plunge in Bankia shares comes just a week after Spain’s government stepped in to partially nationalise the bank. Under that deal, €4.5bn of state loans are being converted into shares, giving the Madrid government 45% of the company.

Like the rest of the Spanish banking sector, Bankia has suffered massive losses because of the country’s property crash. This has left it sitting on around €30bn worth of bad debts to developers, or losses on land and buildings which have been repossessed.

12.54pm: Spain’s economy secretary has just denied that Bankia is suffering a bank run, Reuters reports from Madrid.

Asked about today’s reports that Bankia customers had withdrawn more than €1bn since it was nationalised last week, Fernando Jimenez Latorre told a press conference that:

It’s not true that there is an exit of deposits at this moment from Bankia.

According to news flashes from Madrid, Jimenez Latorre also said that Bankia has everything it needs for succes, and should be given time….

12.32pm: The euro has just slipped to a new four-month low against the US dollar, as fears over the eurozone crisis swept through the foreign exchange markets again.

The euro hit a low of $1.2668, its lowest level since 17 January this year. The dollar was also rallying against other currencies, hitting a four-month high against the Swiss franc.

As well as the sitation in Bankia, traders were reacting to a report that Moody’s would announce updated ratings for 21 Spanish banks tonight. City analysts fear that many of the banks could be downgraded, with the news now expected at 8pm BST.

12.05pm: European stock markets have fallen sharply following the news that Bankia’s shares had tumbled.

In London the FTSE 100 is down 57 points, or 1.05%, at 5348, with Barclays shares falling 3.7%, and IAG (British Airway’s parent company which also owns Spain’s Iberia) down 3.8%.

Spain’s IBEX is down 1.5% at 6510, a new low since 2003.

Italy’s FTSE MIB has dropped almost 2%, with its own financial stocks falling.

The French CAC is down 0.8%, losing 24 points to 3023, while the German DAX is down 0.6%, or 40 points, at 6343.

11.51am: Shares in Spain’s Bankia have now fallen by as much as 26% on the Madrid stock market, following those reports of customers withdrawing funds (see 11.17am for more).

Bankia was previously classed as ‘under auction’ (Reuters reports) — which indicates that a large buy or sell order was passing through the market, or that the Madrid exchange was struggling to match buy and sell orders due to a mismatch.

UPDATE: Looks like I was wrong to state that Bankia shares had actually been officially suspended, as some City traders also thought. It appears that market volatility was causing trading to be interrupted (with thanks to Pablo Rodriguez of El Mundo, which was the first to report that some Bankia customers have been withdrawing funds.

11.31am: Vince Cable, the business secretary, said this morning that Germany can save the eurozone from disaster, pointing out that Europe’s largest economy has done very well out of the single currency.

Cable told my colleague Dan Milmo that he was not “Apocalypse Now” about the crisis. Speaking from Ellesmere Port, where more than 2,000 Vauxhall car manufacturing jobs have been saved this morning, Cable said he confident of a positive outcome to the Greek crisis.

I am not Apocalypse Now about the European Union and the Eurozone. There are risks around Greece but Greece is a very small country. The significance of Greece is if you get contagion but I think that it is possible to be reasonably optimistic that Germany understands those risks and will put mechanisms in place. There are risks and worries and I am not minimising that. But there is every reason to believe that the EU will pull out of this crisis as Britain will.

Asked what ‘mechanisms’ he was referring to, Cable added:

We are talking about the firewall, the willingness of the European Central Bank to intervene, the understanding of the Italian and Spanish governments that if they play their part they will get back-up from, particularly, Germany. The Eurozone has advanced quite a long way from the peak of the crisis

It ultimately comes back to Germany thinking they have done extremely well out of the Eurozone, the competitive exchange rate. They have everything to gain from making sure this succeeds. And they are not just going to let it go down the pan.

11.17am: Shares in Bankia, Spain’s fourth-largest bank, have tumbled by as much as 26% this morning. This follows a report that worried customers have withdrawn more than €1bn from their accounts since it was partially nationalised last week.

The El Mundo newspaper reported this morning that Jose Ignacio Goirigolzarri, the bank’s new chairman, gave Bankia’s board the information at a meeting this week.

Bankia, which was created from seven ‘cajas’ (savings banks) last year, was only floated on the stock market last July.

This graph shows how its share price tumbled in recent weeks, and is down 70% since flotation. That means huge losses for the many retail investors who took part.

10.31am: David Cameron has begun giving his speech in Manchester, warning about the dangers of the eurocrisis. He began by saying:

We are living in perilous economic times. Turn on the TV news and you see the return of a crisis that never really went away. Greece on the brink; the survival of the Euro in question. Faced with this, I have a clear task: to keep Britain safe. Not to take the easy course – but the right course. Not to dodge responsibility for dealing with a debt crisis – but to lead our country through this to better times.

Andrew Sparrow is covering the whole event here, in his Politics Live blog.

10.23am: A striking poster urging a No vote in Ireland’s referendum on the EU fiscal treaty was erected overnight in Central Dublin:

It shows a European fist squeezing Ireland until it bleeds, and was put up by the Mandate union over its headquarters in Dublin’s Parnell Square.

It appeared as the latest opinion polls send a warning sign to the Republic’s governing parties. Just over a third of the Irish electorate remain undecided about what way to vote in a fortnight’s time, according to respected polling firm Milward Brown.

From Dublin, Henry McDonald reports:

Around 35% of voters are in the “Don’t Know” category with 37% saying they will vote Yes and 24% indicating they will vote No. This latest snapshot of Irish public opinion was taken amongst 1,000 voters on Monday and Tuesday for today’s Irish Independent newspaper.

Of the two ruling parties Labour has the toughest task in securing a Yes vote on 31 May with 50% of their supporters saying they oppose the EU fiscal treaty, the poll found.

However a substantial majority of voters want the Republic to remain inside the euro currency zone with three out of every four polled stating they do not want Ireland to exit the euro.

The increase in the “Dont Knows” indicates that the Taoiseach Enda Kenny and his team still have a fight on their hands to persaude the Irish people to ratify a treaty that ties his government and all other states in the EU into tight budgetary controls.

The opposition to the treaty ranges from Sinn Fein and the United Left Alliance over to pro free market multi millionaire businessman Declan Ganley and his Libertas organisation.  Even the British eurosceptic UKIP have entered the fray distributing tens of thousands of leaflets across Ireland urging voters to reject the latest EU treaty.

10.12am: The word from Westminster is that Downing Street officials are confirming that prime minister David Cameron will hold a conference call with François Hollande, Angela Merkel and Mario Monti this afternoon.

This will give the leaders of the UK, France, Germany and Italy a chance to talk ahead of this weekend G8 meeting, where Barack Obama is expected to urge Merkel to back a new eurozone growth package.

9.54am: Spain has seen its borrowing costs jump sharply at an auction of government bonds. That’s worrying, but the good news is that it raised the funding it needed.

The interest rate, or yield, on €1.09bn Spanish bonds maturing in 2016 jumped to 5.106%, compared with 3.374% at a similar auction in March. That underlines the fears swirling through the eurozone.

Spain also sold €1.02bn of 2015 bonds at an average yield of 4.375%, up from 2.89% in April (a much calmer month).

In total, Spain managed to raise €2.5bn, which means it has met 55.8% of its gross funding programme for 2012.

Nicholas Spiro of Spiro Sovereign Strategy said it would be “painful” for the Spanish Treasury to be selling debt at such prices.

Spain is selling its debt at punitive rates against a rapidly deteriorating domestic and external backdrop. Eurozone “break-up contagion” is seeping into Spanish yields.

The Greek crisis is placing huge strain on peripheral eurozone bonds and European bank shares. Spain is on the sharp end of these fears. The Spanish government itself can do very little to shore up confidence in the near term.

Unless there is a bold and decisive response on the part of the eurozone, sentiment towards Spain will deteriorate further. This is a very slippery slope right now.

9.49am: More developments in Greece – Antonis Samaras, the conservative New Democracy party leader, has addressed his parliamentary group this morning saying “we are the front of resistance against catastrophe.”

From Helena Smith in Athens:

The unilateral withdrawal from the EU-IMF sponsored loan deal keeping the Greek economy afloat would be tountamount to the destruction of the country, he said, attacking Syriza for its “lack of preparedness and inability” to govern.

Samaras spelt out “the nightmare” that would ensue if Greece gave up the euro.

Reverting to the drachma would mean wages being “cut in half, deposits being cut in half” and property prices being devalued. The price of imports would skyrocket particularly for food and gas.

“This is the nightmare that those who speak of a unilateral condemnation [of the loan accord] will bring us.”

Looking visibly shaken, the ashen-faced Samaras who had been a vociferous supporter of Greeks going to the polls “as early as possible” after the emergency interim government of Lucas Papademos took over last November, said Greece’s national interests would also be threatened.

“Greece in Europe is protected nationally and geopolitically,” he said. “If we become isolated we will find ourselves totally vulnerable with many around us being tempted to exploit our weakness,” he said.

With the new caretaker government in power the speech in effect kicked off the electoral campaign. Alexis Tsipras’ will also address his parliamentary group at 1:30 PM (11.30am BS) (as I type, his speechwriters are sharpening their pens).

9.30am: We’re hearing that Alexis Tsipras, the head of the Syriza party whose popularity has surged recently, will travel to France and Germany next week to discuss the crisis.

More from Helena.

Senior cadres in Syriza, the radical left group which looks poised to emerged as the biggest party in next month’s elections, have just confirmed that Alexis Tsipras, its leader, will be visiting Berlin and Paris for talks next week.

The 38-year-old, who has sent shockwaves through EU capitals saying that Greece can no no longer commit to the onerous terms of €130bn loan agreement it has signed up to with the EU and IMF, will be departing from Athens for Berlin on Monday.

It’s not clear yet who Tsipras will be meeting.

9.25am: News in from Greece, where our correspondent Helena Smith says the country’s interim caretaker government has just been sworn in.

Helena writes:

In what will go down in modern Greek history as one of the smallest cabinets ever, it is comprised of 16 ministers, mostly university professors and diplomats.

The swearing in of the new cabinet followed a similar ceremony for new prime minister Panagiotis Pikramenos. In another first the make-up of the new government was announced at dawn. A high court judge, Pikramenos takes over from former vice president of the European Central Bank Lucas Papademos who left the post warning that Greeks hadn’t made sacrifices for “an empty shirt” but to put the debt-stricken Greek economy back on track. “There are those who are waiting to benefit from the chaos that will follow the humbling exit of the country from the common currency,” he said.

9.15am: Benedict Brogan of the Daily Telegraph has a good take on David Cameron’s upcoming address in Manchester:

‘The Prime Minister’s speech is the verbal equivalent of grabbing the Germans by the lapels and shouting ‘do something’.

8.51am: Shares have fallen in major European stock markets today, but we’re not seeing a repeat of Wednesday’s selloff.

FTSE 100: down 19 points at 5384, – 0.36%
CAC: down 10 points at 3038, – 0.34%
DAX: down 3 points at 6380, – 0.06%

Mike McCudden of Interactive Investor said markets remain on a “negative trajectory”, despite some traders reckoning that the crisis might prompt yet more quantitative easing from the world’s central banks.

Volatility will remain until the markets have some comfort over Greece and the elections on the 17th June are looking more like a vote on whether they stay in the Euro despite local public opinion.

8.48am: There are reports from Italy this morning that Mario Monti, Francois Hollande, Angela Merkel, David Cameron and Herman Van Rompuy will hold a videoconference this afternoon, ahead of a meeting of G8 leaders this weekend. Nothing official yet…

8.38am: New economic data from Spain has confirmed that its economy shrank by 0.3% in the first three months of 2012, which put it officially back into recession.

No relief for the Madrid government, as it battles record unemployment and the crisis in its banking sector.

Spain will be in the spotlight this morning, as it holds an auction of government debt.

8.35am: $1,000,000,000,000. That’s the cost of a disorderly, badly managed Greek exit from the eurozone, according to the Centre for Economics and Business Research.

The CEBR warned this morning that the end of the euro in its current form is certain. But while a well-managed Greek exit might only knock 2% off global GDP, the worst-case would see a 5% drop in global output (or $1 trillion).

CEBR’s Douglas McWilliams said: “The economic consequences depend on the timing and the way in which the euro splits. There is no doubt that when the euro breaks up it will be costly.

Some countries will lose around 10% of annual GDP. But this will happen anyway – the choice is between a period of austerity followed by the impact of the end of the euro and then some eventual recovery OR facing the trauma of the end of the euro early and then starting to get the recovery underway.”

More details in our front-page story here.

8.15am: The fact that David Cameron will make such a blunt intervention on the eurozone later today underlines the desperately serious nature of the crisis.

The prime minister’s message to Europe will be delivered in the city of Manchester. It appears to be partly a message to his European counterparts, and partly a signal to domestic voters that he will do everything possible to keep Britain safe.

Here’s what we expect the prime minister to say:

Either Europe has a committed, stable, successful eurozone with an effective firewall, well capitalised and regulated banks, a system of fiscal burden sharing, and supportive monetary policy across the eurozone, or we are in uncharted territory which carries huge risks for everybody.

“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.

Cameron may also repeat his line from Prime Minister’s Questions yesterday that the eurozone “either has to make up, or it is looking at a potential break-up”.

Our politics editor, Patrick Wintour, also reports this morning that Treasury insiders has been criticising Germany for demanding too much from peripheral countries. UK sources claim the Westminster government has long been pushing for eurobonds (collective borrowing) and a looser monetary policy.

But while Britain is badly exposed to the eurocrisis, Cameron’s ability to influence events is limited. As political commentator Gaby Hinsliff points out this morning, it’s not ideal for governments to be warning of problems they can’t solve.

..& that’s a dangerous position for govt to be in. warning of perils ahead, sounding rather powerless to stop it.

— Gaby Hinsliff (@gabyhinsliff) May 17, 2012

8.10am: Good morning, and welcome to our rolling coverage of the eurozone financial crisis.

Coming up … David Cameron is due to warn of the desperate consequences of a eurozone break-up. In a sign that the crisis is dominating the political world, the UK prime minister will argue that eurozone leaders must urgently create closer fiscal ties and an effective firewall to prevent their currency union imploding.

More on that shortly.

In Greece, the new caretaker government will be sworn in this morning. Outgoing prime minister Lucas Papademos has warned that the country stands at a “critical crossroads”, but insisted that it can return to “stability, sustainable development and social prosperity”.

In the financial markets, yesterday morning’s mood of panic has been replaced by a sense of weary unease. Asian markets have clawed back some losses overnight, as traders hunker down for weeks of uncertainty until the Greek elections of 17 June.

Cameron delivers speech on euro crisis

• David Cameron’s speech – summary
• Lunchtime summary

1.35pm: Here’s a lunchtime summary.

• David Cameron has renewed his call for the eurozone countries to intensive their efforts to stop Greece falling out of the euro. Later this afternoon he will discuss the crisis in a video conference call with the new French president, Francois Hollande, the German chancellor, Angela Merkel, the Italian premier, Mario Monti, Herman Rompuy, president of the European council, and Jose Manual Barroso, the EU commission president. Earlier Vince Cable, the business secretary, said Britain should not be panicking about the prospect of a Greek exit from the euro.

• Cameron is to urge the French president to dilute his campaign promise to withdraw 3,400 French troops from Afghanistan two years earlier than planned, it has emerged. As Patrick Wintour reports, Cameron will meet François Hollande at the British ambassador’s residence in Washington on Friday ahead of the G8 summit hosted by Barack Obama at Camp David. They are the first talks between the two leaders since Hollande won the presidential election in which Cameron openly backed his rival, Nicolas Sarkozy

• General Motors has announced an investment in the Vauxhall car plant at Ellesmere Port that will save the factory from closure, preserving 2,100 jobs and creating hundreds more.

• George Osborne, the chancellor, has told MPs that the government will spend £30m ensuring that churches affected by his budget decision to impose VAT on repairs to listed buildings are fully compensated. He made the announcement in the Queen’s Speech debate on the economy, which saw Osborne and Ed Balls blaming each other for the poor state of the economy.

• The Northern Ireland attorney general, John Larkin, has dropped court action against Peter Hain after Hain agreed to clarify remarks he made about a high court judge. Hain, the Labour former Northern Ireland, has agreed that the next edition of his memoirs will make it clear that a critical comment about a judge was not intended to undermine the Northern Ireland justice system. “My words were never intended to, not do I believe that they did, in any way undermine the administration of justice in Northern Ireland or the independence of the Northern Ireland judiciary, that very independence and integrity I worked so hard as secretary of state to achieve support for from all sections of the community, including those who had previously denied it,” Hain said in a letter read out in the High Court in Belfast. Larkin was planning to prosecute Hain for “scandalising a judge”. But today, in the light of Hain’s undertaking, Larkin said he would drop the matter.

• The Department for Energy has revealed that the number of UK households in fuel poverty dropped from 5.5m in 2009 to 4.75m in 2010. The fall was mainly due to rising incomes, relatively stable energy prices at the time and reduced energy consumption, according to the 2012 Annual Report on Fuel Poverty released by the department.

• Ed Davey, the energy secretary, has said that he may “tweak” the start date for the next reduction in solar tariffs. Speaking in the Commons, he said: “I do listen to the industry and we are considering tweaking the start date for the next tariff reduction, but if we do it will be a tweak not a massive change.” The next reduction was due to come into effect on 1 July.

• Mark Harper, the constitutional reform minister, has told MPs that the government is “determined” to introduce a statutory register of lobbyists before 2015.

• Graham Brady, the chairman of the Conservative backbench 1922 committee, has said that yesterday’s election to the committee executive was too factional. “I think the campaign was too factional, and occasionally bad-tempered, and I think sometimes colleagues didn’t show the respect for each other that I would like to see,” he said on the BBC’s Daily Poltics show. As Nicholas Watt reports, the elections saw Cameron loyalists make limited progress in dislodging some of the prime minister’s critics from executive posts.

• The Labour MP John McDonnell has come top in the ballot for MPs wanting to introduce a private member’s bill.

• David Blunkett has backed a campaign calling for food for guidedogs to be exempt from VAT.

12.57pm: Ed Miliband (pictured) has responded to David Cameron’s speech. This is what he told BBC News.

David Cameron isn’t part of the solution, he is part of the problem. He promised Britain there would be recovery and he has delivered a recession.

All of Europe’s leaders, including David Cameron, bear responsibility for the fact that over the last two years they haven’t sorted out the problems of the eurozone and they haven’t had a proper plan for growth and jobs in Europe.

When you listen to the prime minister, he is like a man watching events. He is the prime minister – he should be getting in there, getting it sorted out with Europe’s leaders. Sorting it out means not just sorting out the eurozone problems, but getting that proper plan for growth in Europe, just like we need a proper plan for growth here in Britain.

The prime minister should be showing leadership, not looking like a man who is a bystander to events, shouting from the rooftops.

12.29pm: Here’s a summary of the key points from David Cameron’s speech.

• Cameron reaffirmed his call the eurozone countries to do more to support Greek’s bid to remain in the euro. He suggested that Germany should contribute more and the eurozone countries should use eurobonds to help countries like Greece. But he also said that more fundamental fiscal integration was essential.

The Eurozone needs to put in place governance arrangements that create confidence for the future. And as the British Government has been arguing for a year now that means following the logic of monetary union towards solutions that deliver greater forms of collective support and collective responsibility of which Eurobonds are one possible example. Steps such as these are needed to put an end to speculation about the future of the euro.

This was billed as a new warning to the eurozone, but actually Cameron has been making these points for some time now. Today’s warning was blunter than usual, because Cameron floated the possibility of Greece leaving the euro if the eurozone countries failed to address their problems, but there was nothing novel in it in policy terms.

The problem for Cameron is that he has delivered a “last chance” message like this before. For example, this is what he said in October last year.

Action needs to be taken in the next coming weeks to strengthen Europe’s banks, to build the defences that the euro zone has, to deal with the problems of debt. They’ve got to do that now. They’ve got to get ahead of the markets now.

Experience suggests that the eurozone countries are quite capable of ignoring these warnings.

• He urged voters waiting for a recovery in the UK to be patient. Rebuilding the economy was “a long-term project”, he said. “It’s painstaking work.”

• He accepted that the government needed to do “even more” to promote growth. “The additional ingredient that government will deliver and needs to do even more of is a radical programme of microeconomic reform to make our economy more competitive -including competitive tax rates, planning reform and deregulation,”

• He suggested that the government would expand its credit easing programme.

• He rejected Labour’s call for the austerity programme to be relaxed to promote growth. That was “a cop-out”, he said, and would mark a return to the “something for nothing economics that got us into this mess”. In a passage about Europe, he also said that the idea that high-deficit countries could spend their way to recovery was “a dangerous illusion”.

And I’ve found out why Sky and BBC News were not able to show the speech live. Cameron was speaking on the 16th floor of a building, and the broadcasters couldn’t get their kit to reach that high.

12.17pm: My colleague Dan Milmo has been speaking to Vince Cable about the eurozone crisis this morning. Dan has sent me this.

Speaking from Ellesmere Port, where more than 2,000 Vauxhall car manufacturing jobs have been saved this morning, Cable said he confident of a positive outcome to the Greek crisis. “I am not Apocalypse Now about the European Union and the Eurozone. There are risks around Greece but Greece is a very small country. The significance of Greece is if you get contagion but I think that it is possible to be reasonably optimistic that Germany understands those risks and will put mechanisms in place. There are risks and worries and I am not minimising that. But there is every reason to believe that the EU will pull out of this crisis as Britain will.”

Asked what ‘mechanisms’ he was referring to, Cable added: “We are talking about the firewall, the willingness of the European Central Bank to intervene, the understanding of the Italian and Spanish governments that if they play their part they will get back-up from, particularly, Germany. The Eurozone has advanced quite a long way from the peak of the crisis. It ultimately comes back to Germany thinking they have done extremely well out of the Eurozone, the competitive exchange rate. They have everything to gain from making sure this succeeds. And they are not just going ti let it go down the pan.”

11.30am: David Cameron is taking part in a video conference with his fellow EU leaders who are attending this weekend’s G8 summit in America this afternoon, Downing Street has revealed. My colleague Nicholas Watt has the details on Twitter.

PM to hold vid conf at 4.15 with Merkel, Hollande, Monti, Van Rompuy + Barroso – EU reps at #G8

Video conf was idea of Herman Van Rompuy – agreed a week ago – to discuss EU positions ahead of #G8

Vid conf: only PM’s 2nd conversation with Francois Hollande. 1st chat election night #G8

11.21am: Chuka Umunna, the shadow business secretary, says Cameron has “his head in the sand”. Cameron has run out of excuses for the fact that the economy has failed to grow, Umunna tells BBC News.

11.17am: Cameron did do a Q&A session with journalists after the speech. As soon as it pops up on BBC News or Sky, I’ll cover it.

11.16am: The full text of David Cameron’s speech is now on the Number 10 website.

11.09am: Cameron winds up with a “whatever it takes” declaration.

I cannot predict how this crisis will end for others. And I cannot pretend that Britain will be immune from the consequences, either. 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 country and hold our course.

As prime minister, I will do whatever it takes to keep Britain safe from the storm.

11.08am: Cameron says globalisation offers big opportunities for the UK.

As nations get richer they spend more money on products where Britain excels. On everything from financial services and pharmaceuticals to jet engines, music and computer games.

The globalisation of demand means new countries demanding our products, fuelling new jobs at home.

11.05am: Cameron says that, although the Doha trade round is “going nowhere”, that does not mean countries like Britain cannot promote free trade.

There is good work from Doha that we can salvage. Like the measures to break down the bureaucracy over getting goods across borders. I want to see a commitment to open markets and to rolling back protectionist measures already in place.

And most importantly, I want us to move forwards with “coalitions of the willing”, so countries who want to, can forge ahead with ambitious deals of their own because we all benefit from the increased trade and investment these deals foster.

Cameron says that means getting EU trade deals finalised with India, Canada and Singapore. The EU should also open negotiations with Japan and the US, he says. A trade deal with the US would be “the single biggest bilateral deal that could benefit Britain”.

11.03am: Cameron says there also needs to be action at a global level.

So over the coming weeks I’ll be flying to Camp David and to Los Cabos in Mexico to fight for what is right for Britain at the G8 and G20 summits.

That means committing together to make the reforms we need to our economies to get growth in the global economy working again, including involving organisations like the IMF. It means persisting with reforms to make our banks safe, by implementing high-quality, global financial regulatory standards. It means recognising the risks to the recovery from rising and volatile energy prices and working together to ensure our energy security. And most of all it means getting together to give the world economy the one big stimulus that would really make a difference an expansion of trade freedoms, breaking down the barriers to world trade.

11.00am: And, third, Europe needs to address its “low productivity and lack of economic dynamism”, he says. The single market needs to be completed.

And then Cameron issues his “eurozone at a cross-roads” warning.

The Eurozone is at a cross-roads. It either has to make-up or it is looking at a potential break-up. Either Europe has a committed, stable, successful Eurozone with an effective firewall, well capitalised and regulated banks, a system of fiscal burden sharing, and supportive monetary policy across the Eurozone.

Or we are in unchartered territory which carries huge risks for everybody. As I have consistently said it is in Britain’s interest for the Eurozone to sort out its problems.

10.59am: Back to the speech. Cameron says the second thing that needs to happen is more political cooperation in the eurozone.

Second, the Eurozone needs to put in place governance arrangements that create confidence for the future. And as the British Government has been arguing for a year now that means following the logic of monetary union towards solutions that deliver greater forms of collective support and collective responsibility of which Eurobonds are one possible example. Steps such as these are needed to put an end to speculation about the future of the euro.

10.57am: BBC News are now broadcasting the Cameron speech. They weren’t able to show it live for technical reasons. At the moment I’m ahead of the BBC broadcast.

10.52am: Cameron says three things need to happen for the eurozone to function properly.

First, the high-deficit eurozone countries need to address their problems.

First, the high deficit, low competitiveness countries in the periphery of the Eurozone do need to confront their problems head on. They need to continue taking difficult steps to cut their spending, increase their revenues and undergo structural reform to become competitive. The idea that high deficit countries can borrow and spend their way to recovery is a dangerous delusion.

But this will only be able to happen if the rich countries in the eurozone and the European Central Bank do more to support countries like Greece.

So I welcome the opportunity to explore new options for such monetary activism at a European level, for example through President Hollande’s ideas for project bonds. But to rebalance your economy in a currency union at a time of global economic weakness you need more fundamental support.

Germany’s finance minister, Wolfgang Schäuble is right to recognise rising wages in his country can play a part in correcting these imbalances but monetary policy in the Eurozone must also do more.

10.49am: Turning to the euro, Cameron says that without Germany, the eurozone would be in a recession.

I realise that countries inside the Eurozone may not relish advice from countries outside it – especially from countries, such as Britain, with debts and difficulties of their own.

But the eurozone crisis affects the UK, he says. As Sir Mervyn King, the governor of the Bank of England, said yesterday, the eurozone crisis poses the biggest threat to the UK’s recovery.

This Coalition government was formed in the midst of a debt crisis in the Eurozone. Two years later and little has changed. That’s the backdrop against which we have to work. So it’s only right that we set out our views. We need to be clear about the long-term consequences of any single currency. 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.

A rigid system that locks down each state’s monetary flexibility yet limits fiscal transfers between them can only resolve its internal imbalances through painful and prolonged adjustment.

10.47am: Back to the speech. Cameron says legislation on its own will not create growth.

Some people asked why we didn’t have more economy Bills in the Queen’s Speech. If you could legislate your way to growth, obviously we would. The truth is you can’t.

10.45am: But the government needs to do more, he says.

I believe that there is more that we can do. We can use the hard-won credibility of the government’s balance sheet to help the economy grow without adding even further to our debt.

Let me tell you what this means.

In many areas we are already using the credibility we have earned to pass on the benefits of low interest rates to businesses and families. We have the credit easing programme for small businesses we have mortgage help for people who want new homes and then there are the guarantees for new infrastructure projects.

I want us to go further, so I’ve asked the Treasury to examine what more we can do to boost credit for business, housing and infrastructure.

This sounds as if he’s announcing an extension of credit easing, but, from the text, it’s not immediately clear how significant this is. I’ll post more when I get it.

10.43am: Cameron lists some of the things the government is doing to promote growth: short-term measures, like cutting corporation tax, the National Loan Guarantee Scheme and reforming planning; medium-term measures like the Regional Growth Fund and apprenticeships; and long-term measures like High Speed Rail.

10.41am: Cameron accepts the government needs to do more to promote growth.

Fiscal responsibility and monetary activism is the right macroeconomic mix for our over-indebted economy. But the additional ingredient that government will deliver and needs to do even more of is a radical programme of microeconomic reform to make our economy more competitive -including competitive tax rates, planning reform and deregulation.

10.39am: And here’s the attack on Labour’s proposed economic strategy.

Those who argue we should spend more want us to borrow more, driving up our deficit and our debt and putting our hard-won credibility and low interest rates at risk.

Higher interest rates would mean higher mortgages, lower employment and even more of the money people work so hard for wasted paying the interest on our national debt. We must not and will not let this happen.

10.38am: Cameron says the government still spends £120m a day on interest on Britain’s debt and that the government is doing what it can to bring the deficit down.

A central promise of this government – and one of the key tasks that brought the Coalition together – was to deal with this deficit. That is the only path to prosperity.

And that is exactly what we are doing. Despite headwinds from the Eurozone, we are on track. It is a long-term project. It is painstaking work. But the tough decisions we have taken on deficit reduction really are beginning to yield real results. And there can be no deviation from this.

10.32am: Cameron says today’s General Motors investment at the Vauxhall plant at Ellesmere Port (see 9.35am) is a vote of confidence in the British car industry.

Look across the country, at Honda in Swindon, Jaguar Land Rover in the West Midlands, Toyota in Derby and Nissan in Sunderland. Britain’s car industry is growing.

Indeed, this week our balance of trade in cars turned positive in the first quarter – for the first time since 1976 when Jim Callaghan went to the IMF. And it’s not just our car industry which is strong. Life sciences, pharmaceuticals, information technology, aerospace, the creative industries, services. Britain has a stronger base from which to grow.

10.26am: Sky and BBC News have not deemed Cameron’s speech important enough to give it the live treatment. [UPDATE at 12.29pm: That's not right. They could not cover it for technical reasons. See 12.29pm.] But colleagues are tweeting from Manchester, and I’ve got a text in front of me, so the blogging carries on. I’m reporting using the text issued by Number 10 this morning, not from what I can hear Cameron saying. It’s not an ideal arrangement, but it’s unusual for the prime minsiter to depart from his text and this seems better than not reporting the speech at all.

Cameron says the government has cut the deficit by a quarter already.

Since we took office two years ago, we have cut the deficit by more than a quarter.
Yesterday, we had encouraging news on unemployment, too. The number of people in work – up by 100,000 in the last quarter. And the number of new business start-ups last year was one of the highest in our history. So now more than ever this is the time to stand firm.

It is important not to squander the progress made, he says.

Yes, we are doing everything we can to return this country to strong, stable economic growth. But no, we will not do that by returning to the something for nothing economics that got us into this mess.

We cannot blow the budget on more spending and more debt.

10.22am: David Cameron is starting his speech in Manchester.

We are living in perilous economic times. Turn on the TV news and you see the return of a crisis that never really went away. Greece on the brink; the survival of the Euro in question. Faced with this, I have a clear task: to keep Britain safe. Not to take the easy course – but the right course. Not to dodge responsibility for dealing with a debt crisis – but to lead our country through this to better times.

My message today is that it can be done. We are well on the way in this journey.

10.14am: David Cameron is about to deliver his speech in Manchester on the economy and the euro crisis.

Here’s Patrick Wintour’s story previewing what he’s going to say.

10.09am: You can read all today’s Guardian politics stories here. And all the politics stories filed yesterday, including some in today’s paper, are here.

As for the rest of the papers, here are some articles and stories that are particularly interesting.

• Peter Oborne in the Daily Telegraph says Britain should be helping the Greeks to leave the euro.

Something strange has happened. Mr Cameron and Mr Osborne appear to have swallowed the official European line that unthinkable disaster will ensue when the euro collapses. And, of course, it will be messy when Greece exits the euro. But the truth is that the single currency has been calamitous for the peripheral countries of Europe, and will get more calamitous the longer they stay in. Now is the time for them to walk away. And here Britain’s traditional role should be to provide help and support – for instance, by offering some of the most brilliant City minds to help the Greeks negotiate an elegant exit and plot a solvent future. Instead, the Chancellor is siding with Greece’s tormentors.

• David Aaronovitch in the Times (paywall) says there are too many lawyers in parliament.

Whether the issue is drugs policy or the introduction of phonics into schools, we don’t apply the methods that we could to help us to make better decisions. Rather, we rely on selective evidence, persuasion, rhetoric and crossing our fingers and hoping like hell. So why is that? One reason may be that scientists don’t get to be decision makers and lawyers do. Of 650 MPs there are 158 from business, 90 former political advisers, 86 lawyers and 38 journalists. Just one MP worked as a research scientist and two have science PhDs. In the US Senate there are no former research scientists, but 38 per cent of senators are lawyers. In President Sarkozy’s first 16-strong, cabinet, 9 members were lawyers or had law degrees.

I love lawyers. I love their intellect … But lawyers are not, in the way that scientists are, truth seekers. When lawyers test the evidence, they do so not to get as close to the truth as they can, but to make an argument or to decide whether a law has been broken or upheld. And now, in this era of judicial inquiries and extended judge-power, much of our governance seems to be a series of turf wars between lawyers in politics and lawyers in law.

It’s good that there is something of a resurgence of interest in science, of which the sceptics movement is a part. Perhaps we will see a day when — as the writer Alexandra Robbins put it, the geeks shall inherit the earth and a Martin Rees, a Colin Blakemore and a Lesley Yellowlees can sit at a Cabinet table presided over by Stella Creasy (Labour, PhD in social psychology), or Therese Coffey (Conservative, PhD in chemistry) or even Julian Huppert (Liberal Democrat, PhD in Biological Chemistry). And, if the evidence points in that direction, they might even let a lawyer or two in to join them.

• Kiran Stacey in the Financial Times (subscription) says the Department for Work and Pensions has dismissed Steve Hilton’s call for welfare cuts worth £25bn as “utter nonsense”.

Mr Duncan Smith, the work and pensions secretary, is keen on looking at ways to encourage part-time workers to make the move into full-time employment, among other measures likely to be part of a spending review some time in the next three years. But a person close to the minister described the £25bn figure on Wednesday as “nonsense”, saying there was no room left for such steep cuts.

The work and pensions department is already planning to save £18bn a year in benefit payments by 2014-15 by implementing measures such as a cap on housing benefit and less money for disabled people.

The person said: “We have already cut £18bn from the welfare bill. How does he imagine we can cut another £25bn? This is utter nonsense, the figure is ludicrous.”

• And Sue Cameron in the Daily Telegraph says Hilton’s plan to cut the size of the civil service by 90% has also been dismissed as nonsense.

[Steve Hilton] is the man whose calls for a further 90 per cent cut in Civil Service numbers have been hitting the headlines. One of his justifications is that we once ran an empire with only 4,000 civil servants – so how can we justify a Civil Service of 434,000 today just to run Britain? It’s a fun argument. It is also absurd.

It is true that under the Raj we ran India and her 400 million people with fewer than 1,500 civil servants. Yet so disproportionate are the numbers that they should have raised questions – even with Mr Hilton. As the historian Niall Ferguson asks in his brilliant book Empire: How Britain Made the Modern World: “Was this the most efficient bureaucracy in history? Was a single British civil servant really able to run the lives of up to three million Indians, spread over 17,000 square miles, as some district officers were supposed to do?”

The answer, of course, was no. As Mr Ferguson explains, beneath the tiny top layer of overwhelmingly British officials was another, much larger bureaucracy composed of Indians who carried out day-to-day administration. And below them, says Mr Ferguson, “was a veritable army of lesser public employees… Without this auxiliary force of civil servants who were native born, the ‘heaven-born’ would have been impotent.”

Funnily enough, the senior Civil Service in Britain today comprises just over 3,700 people. The other 430,300 are the front-line troops who run Jobcentres, tax offices, pensions, prisons and myriad other services. Small wonder that Mr Hilton, who has never run a large organisation, was given short shrift by the head of the Civil Service, Sir Bob Kerslake. After a stormy meeting, Sir Bob, who used to run Sheffield, told Mr Hilton that the idea of a further 90 per cent cut in numbers was “nonsense”.

• Graeme Paton in the Daily Telegraph says the government could give schools complete freedom over teachers’ pay.

Ministers are considering proposals for a “complete deregulation” of salaries to give schools more power to curb pay rises for the worst teachers, it was revealed.

The Coalition said sweeping reforms were needed because rewards are currently being given to the “great majority of teachers” – creating little incentive for staff to improve.

It could lead to schools in England paying some qualified teachers at a “significantly reduced” rate, the Government admitted. Average classroom teachers currently receive £34,700 a year.

9.48am: For the record, here are the YouGov GB polling figures from last night.

Labour: 45% (up 2 points from Tuesday night)
Conservatives: 31% (down 1)
Lib Dems: 9% (up 1)
Ukip: 8% (down 1)

Labour lead: 14 points

Government approval: -37

It’s the second time this week Labour have had a 14-point lead in a YouGov poll. That’s the biggest lead YouGov have recorded for Labour since the polling firm was founded in 2002.

9.35am: It’s not all bad news today. Following a vote by workers at the Vauxhall plant at Ellesmere Port in favour of new working conditions, the firm is going to confirm an investment that will secure 2,100 jobs.

9.28am: David Cameron has released extracts from his speech in advance. And Ed Balls (pictured), the shadow chancellor, has released his rebuttal in advance too. Here’s an extract.

David Cameron is totally out of touch and deeply complacent if he thinks Britain is on the right course. His failed policies have pushed us into recession and the government is now set to borrow an extra £150 billion to pay for this economic failure.

Plan A has failed in Britain, but it is also now failing across the eurozone. David Cameron must recognise the austerity policies which are failing in Europe are the very same policies that have failed in Britain and which the British government has been urging eurozone countries to stick with …

Instead of using the eurozone crisis as an excuse for Britain’s problems David Cameron must wake up to the fact that our economy has not grown for over a year and a half on his watch. When countries like France and Germany have avoided recession, despite the eurozone’s problems, it’s clear Britain’s double-dip recession was made in Downing Street.

9.13am: There’s a lot of comment about the eurozone crisis on the airwaves this morning.

Vince Cable (pictured), the business secretary, said people in Britain should not be panicking.

We need to get the risks in perspective. There clearly are risks to the UK. Greece itself is a small country, it’s only 2% of the European economy. The risks arise if the crisis were spread to other weaker, countries in southern Europe, but there is no reason why that should happen. They are in the process of creating firewalls to prevent the financial crisis spreading and we hope that they do.

But as far as the UK is concerned we can’t directly influence what is happening in the eurozone because we are not part of it. What we can do is to make sure that the UK is a well-run economy … I don’t think there’s any reason whatever why in the UK we should be panicking or taking an excessively negative view.

Lord Lamont, the Conservative former chancellor, said a Greek exit would be “messy” but that that would be better than allowing the crisis to prolong.

If we get a situation that is just going on and on, I think that’s worse.

The immediate effects of a Greek departure don’t go to this country but they would reach us indirectly. The worst effects are on the banking system, first on the Greek banks, but then on French banks that have lent to Greece, and then British banks that have lent to France, so indirectly we are involved.

But the most damaging thing I think is this corrosive effect on confidence. We hear all the time demands for more growth – growth above all depends on individuals and individuals will only grow their business if there is confidence. This going on and on and on – and it’s a very serious crisis – the threat being in the background is profoundly destabilising.

Alistair Darling, the Labour former chancellor, said it would be better if Greece did not leave the euro.

I think it is not in the eurozone’s interests to let Greece go. I think it would be cheaper to reach a deal with Greece that actually works because the present one is never going to work.

It is going to be very painful for Greece whatever they do, but there is no easy options here but the risk of Greece going out and spreading to other countries in Europe is too great. Look at it from Germany’s point of view. The last thing they want is a break-up of the euro and a return to the Deutschmark. It would price them out of the market.

I’ve taken some of the quotes from PoliticsHome.

9.00am: “We are living in perilous economic times.” That’s what David Cameron is going to tell us in a speech in Manchester. It is being billed by Number 10 as a speech on the economy and Cameron will use it to reject Labour’s calls for a “Plan B”.

We will not do that by returning to the something for nothing economics that got us into this mess. We cannot blow the budget on more spending and more debt. It would squander all the progress we’ve made in these last two, tough years. It would mean more austerity, for even longer. It would risk our future.

But there will probably be more interest in what he has to say about the eurozone crisis. As the Guardian reports today, it is estimated that a disorderly Greek withdrawal from the eurozone (and no one has worked out how to achieve an orderly withdrawal yet) would cost the eurozone $1trn (that’s trillion – 12 noughts). Accordig to the extract sent out by Number 10 in advance, Cameron is going to say the eurozone leaders either have to take decisive steps to protect their currency, or accept that Greece is on its way out.

The eurozone is at a cross-roads. It either has to make-up or it is looking at a potential break-up.

Either Europe has a committed, stable, successful eurozone with an effective firewall, well capitalised and regulated banks, a system of fiscal burden sharing, and supportive monetary policy across the eurozone. Or we are in unchartered territory which carries huge risks for everybody.

As I have consistently said it is in Britain’s interest for the eurozone 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.

I’ll be covering the speech in detail, and all the reaction to it. There will also be further coverage of the eurozone crisis on our eurozone crisis live blog.

Here are the other items in the diary for today.

9.20am: Universities UK holds a briefing on the impact of the government’s immigration policies on universities.

10am: Mark Harper, the constitutional affairs minister, gives evidence to the Commons political and constitutional reform committee about the registation of lobbyists.

10am: Sir Harold Evans, the former Sunday Times editor, and Peter Oborne, the Daily Telegraph columnist, give evidence to the Leveson inquiry.

10.15am: David Cameron will deliver his speech on the economy in Manchester.

As usual, I’ll be covering all the breaking political news, as well as looking at the papers and bringing you the best politics from the web. I’ll post a lunchtime summary at around 1pm and another in the afternoon.

If you want to follow me on Twitter, I’m on @AndrewSparrow.

And if you’re a hardcore fan, you can follow @gdnpoliticslive. It’s an automated feed that tweets the start of every new post that I put on the blog.

David Cameron urges eurozone to follow UK model for recovery

Cameron says eurozone is at a crossroads and urges it to adopt its own pro-business, pro-growth agenda

David Cameron has called on the eurozone to take a leaf out of the UK’s book in order to overcome its current crisis, insisting that the British economy was “moving in the right direction”.

The government’s austerity measures have been blamed by Labour for the UK suffering a double-dip recession, but the prime minister said the UK had achieved a balance between deficit reduction and growth that was lacking in the eurozone.

“Just as in Britain we need to deal with the deficit and restore competitiveness, so the same is true of Europe,” he said. “This is a debt crisis. And the deficits that caused those debts have to be dealt with. But growth in much of the eurozone has evaporated completely. Indeed without the recent German growth figures, it would be in recession.”

Polls show support for the government’s economic policy receding in the face of criticism that not enough is being done to stimulate growth.

But Cameron said the government had taken “active interventions such as credit easing, mortgage indemnities for first-time buyers and guarantees for new infrastructure projects” and urged the eurozone to adopt its own “pro-business, pro-growth agenda”.

Speaking in Manchester on Thursday, the prime minister said the eurozone crisis, uncertainty over the direction of the global economy and the struggle to recover from recession at home, meant the UK was living through “perilous economic times”.

He painted a bleak picture of the threat posed to the UK by events in Greece. “The eurozone is at a crossroads,” he said. “It either has to make-up or it is looking at a potential break-up. Either Europe has a committed, stable, successful eurozone with an effective firewall, well capitalised and regulated banks, a system of fiscal burden sharing, and supportive monetary policy across the eurozone. Or we are in uncharted territory, which carries huge risks for everybody.”

Cameron said that Britain could not cut itself off from what was happening elsewhere, but that he would “do what it takes to shelter the UK from the worst of the storms”. Warning of “dangerous voices” urging the government to retreat on cutting the deficit, he said: “Deficit reduction and growth are not alternatives. Delivering the first is vital in securing the second. If markets don’t believe you are serious about dealing with your debts, your interest rates rocket and your economy shrinks.”

The Labour leader, Ed Miliband, said Cameron had caused recession in the UK and bore responsibility with other European leaders for failing to come up with a proper plan for growth and jobs across the continent.

“He is the prime minister – he should be getting in there, getting it sorted out with Europe’s leaders,” Miliband told BBC News. “Sorting it out means not just sorting out the eurozone problems, but getting that proper plan for growth in Europe, just like we need a proper plan for growth here in Britain.

“The prime minister should be showing leadership, not looking like a man who is a bystander to events, shouting from the rooftops.”

Cameron will have a video conference call with the French president, François Hollande, German chancellor, Angela Merkel, and Italian prime minister, Mario Monti, on Thursday afternoon. They will be joined by the president of the European Council, Herman Rompuy, who suggested the discussion ahead of the start of the G8 meeting tomorrow, and the EU commission president, José Manual Barroso.

The business secretary, Vince Cable, speaking from Ellesmere Port, where more than 2,000 Vauxhall car manufacturing jobs have been saved, told the Guardian he was confident of a positive outcome to the Greek crisis.

“I am not Apocalypse Now about the European Union and the eurozone. There are risks around Greece but Greece is a very small country. The significance of Greece is if you get contagion, but I think that it is possible to be reasonably optimistic that Germany understands those risks and will put mechanisms in place.

“There are risks and worries and I am not minimising that. But there is every reason to believe that the EU will pull out of this crisis as Britain will.”

Asked what mechanisms he was referring to, Cable said: “We are talking about the firewall, the willingness of the European Central Bank to intervene, the understanding of the Italian and Spanish governments that if they play their part they will get back-up from, particularly, Germany.

“The eurozone has advanced quite a long way from the peak of the crisis. It ultimately comes back to Germany thinking they have done extremely well out of the eurozone, the competitive exchange rate. They have everything to gain from making sure this succeeds. And they are not just going to let it go down the pan.”

Cost of Greek exit from euro put at $1tn

UK government making urgent preparations to cope with the fallout of a possible Greek exit from the single currency

The British government is making urgent preparations to cope with the fallout of a possible Greek exit from the single currency, after the governor of the Bank of England, Sir Mervyn King, warned that Europe was “tearing itself apart”.

Reports from Athens that massive sums of money were being spirited out of the country intensified concern in London about the impact of a splintering of the eurozone on a UK economy that is stuck in double-dip recession. One estimate put the cost to the eurozone of Greece making a disorderly exit from the currency at $1tn, 5% of output.

Officials in the United States are also nervously watching the growing crisis: Barack Obama on Wednesday described it as a “headwind” that could threaten the fragile American recovery.

In a speech in Manchester before flying to the United States for a summit of G8 leaders, the British prime minister, David Cameron, will say the eurozone “either has to make up or it is looking at a potential breakup”, adding that the choice for Europe’s leaders cannot be long delayed.

“Either Europe has a committed, stable, successful eurozone with an effective firewall, well capitalised and regulated banks, a system of fiscal burden sharing, and supportive monetary policy across the eurozone, or we are in uncharted territory which carries huge risks for everybody.

“Whichever path is chosen, I am prepared to do whatever is necessary to protect this country and secure our economy and financial system.”

Officials from the Bank, the Treasury and the Financial Services Authority are drawing up plans in the expectation that a Greek departure from monetary union – increasingly seen as inevitable by financial markets – could be as damaging to the global economy as the collapse of Lehman Brothers in September 2008.

With a second election in Greece called for 17 June, King dropped a strong hint that the Bank would take fresh steps to stimulate growth if policymakers in Europe failed to deal with the sovereign debt crisis.

“We have been through a big global financial crisis, the biggest downturn in world output since the 1930s, the biggest banking crisis in this country’s history, the biggest fiscal deficit in our peacetime history and our biggest trading partner, the euro area, is tearing itself apart without any obvious solution,” he said.

Doug McWilliams, of the Centre for Economic and Business Research, said a planned breakup of the single currency would cost 2% of eurozone GDP ($300bn) but a disorderly collapse would result in a 5% drop in output, a $1tn loss. “The end of the euro in its current form is a certainty,” he added.

Alistair Darling, who was Chancellor of the Exchequer under the former Labour administration, said: “This has the seeds of something disastrous. It is madness. If it spreads to bigger countries, this could be really disastrous for Europe. It could consign us to years of stagnation.”

Capital flight from Greece has increased since it became clear that a coalition government could not be formed after the election earlier this month. The Greek president, Karolos Papoulias, said citizens were withdrawing their money amid “great fear that could develop into panic” at the risk of a debt default and exit from the euro area, according to minutes of their meetings posted on the presidency’s website. In little more than a week following the election on 6 May, €3bn was withdrawn from bank accounts. The central bank reported that €800m was taken out in a single day earlier this week.

The head of the International Institute of Finance banking lobby, Charles Dallara, said money was leaving Greece at a growing pace due to political uncertainty. “There has been a pickup of deposit flight from Greece, but I think that is stabilisable once you get a new government in place, if that government reaffirms its intention to remain in the eurozone.” The damage to the rest of Europe if Greece were to leave the euro would be “somewhere between catastrophic and armageddon”, he said.

The Spanish prime minister, Mariano Rajoy, told parliament that his country faced trouble financing itself as borrowing costs shoot up to “astronomic” levels. The Irish finance minister, Michael Noonan, said Dublin’s plan to return to capital markets in late 2013 might not be achievable because of the uncertainty.

The first meeting between French president François Hollande and German chancellor Angela Merkel helped to calm nerves in the markets at one stage, with suggestions that Berlin might be amenable to initiatives to boost growth in Greece and the other austerity-stricken nations of the eurozone.

But the jittery mood was underlined by a fall in European shares and the single currency late in the day amid reports that the European Central Bank was cutting off its funding lifeline to Greek banks that had failed to amass enough capital to protect them from future losses.

The ECB later said it expected the Greek central bank to use part of the €130bn bailout from the EU and IMF to ensure that the country’s banks were safeguarded from collapse, and that they would receive additional help from Frankfurt only once this had happened. Already delayed by the political uncertainty in Greece, €18bn is now expected to be released to recapitalise the banks.

Sony Kapoor, of the Brussels-based Re-Define thinktank, said: “The high-stakes game of chicken between Greek and other EU politicians must end now. Those saying that a Greek exit from the eurozone will not be a big deal either don’t know what they are talking about, or have some ulterior motives. The social, political and economic damage to the EU from a Greek exit is potentially incalculable.”

At the G8 summit, which starts on Friday, Obama will press Merkel to lean more towards a growth package for Europe, instead of pressing so hard for the austerity measures that were rejected by Greek voters.

But foreign affairs analysts said that Obama’s leverage with the European leaders is minimal. Although the US has the economic muscle to help Europe out of its mess, the Obama administration has taken the strategic decision not to become involved directly.

Instead, Obama is to use the Camp David summit for some quiet diplomacy, hoping to sway Merkel to endorse some immediate actions to help growth.

King, speaking at the publication of the Bank of England’s quarterly inflation report, said growth in Britain was weaker and inflation higher than Threadneedle Street had expected three months ago. It would take until 2014 for output to return to where it was in 2008, when Britain’s deepest post-war recession began.

“What is so depressing about it is that this is a rerun of the debates in 2007/08 – these are not liquidity problems, they are solvency problems,” King said. “Imbalances between countries in the euro area have created creditors and debtors and at some point the credit losses will need to be recognised and absorbed and shared around,” he said.

“Until that is done, there will not be a resolution. That is why just kicking the can down the road is not an answer. The European Central Bank has performed heroically in trying to buy time but that time hasn’t been used to put in place fundamental underlying solutions.”

Eurozone banks nearly collapsed, says ECB director

Benoît Coeuré says conditions were very dangerous in autumn of 2011 and banks faced severe difficulties to fund themselves

A senior executive at the European Central Bank has admitted eurozone banks were on the brink of collapse last autumn.

In an interview with the BBC to be broadcast on Thursday, Benoît Coeuré, executive director of the ECB, said: “In the autumn of 2011 the conditions were very dangerous … European banks were facing severe difficulties to fund themselves, to access finance, and we were very close to having a collapse in the banking system in the euro area, which would have also led to a collapse in the economy and to deflation. And this is something that the ECB could not accept.”

The concern about the state of the banking system led to €1tn being lent to banks through three-year loans and came as UK banks were told to make preparations for a potential exit of countries from the single currency.

In November Andrew Bailey, the Financial Services Authority’s top regulator, told banks: “We must not ignore the prospect of the disorderly departure of some countries from the eurozone.”

Those contingency plans are now being dusted down amid speculation over a Greek exit. British banks have taken steps to reduce their exposure to Greek government bonds and other loans.

Icap, the City currency broker, is ready to reintroduce a drachma trading facility by installing a new panel on its electronic screens. Michael Spencer, its chief executive, said: “I don’t think it’s going to happen in the next week, but I think it’s going to happen.” He dismissed concerns about the entire eurozone breaking up, but said other countries might leave and a Greek exit “needs to be organised … sensibly”.

While the timing of any exit is not clear, in their preparations bank banks are assuming a decision would be made quickly as the country would need to close down its borders and its banks to stop funds flooding out of the country.

One unknown is exactly how the Greek currency would be denoted in the payment system – known as Swift (Society for Worldwide Interbank Financial Telecommunication) – that works behind the scenes moving money electronically around the world . The decision lies with the International Standards Organisation.

When Greece joined the euro the drachma had been known as GRD and identified by the numeric code 300. Some bankers hope the new code will be different to ensure computers do not pick up any legacy information. Despite requests by banks for notification of the code, no decision will be made until a formal request by Greece. Then, a decision will be taken within hours.

The hope is that a departure from the eurozone would happen over a weekend, allowing each of the UK’s major banks to deploy hundreds of people to switch over computer systems to allow them to handle the Greek drachma again.

Banks have attempted to cushion the initial impact by selling off their Greek government bonds and reducing their exposure to corporate loans. Legal documents have been checked to ensure loans are written in English law rather than Greek law, permitting payments to continue in euros rather than the new drachma, which is expected to lose at least 50% of its value instantly. Greece joined the single currency at a rate of 350 drachma to the euro.While the computers can be reprogrammed, meeting demands from customers walking into branches to ask for drachma notes will be difficult as the currency will be controlled by Greece’s central bank. Unless officials have been secretly printing drachma notes, the fastest solution could be to stamp drachma or some such symbol across existing euro notes – although Greek shopkeepers and merchants may well be keener to accept clean euros rather than mock drachmas. Banks are also ready to be able to process credit card transactions for their customers in the new currency.

Greece in crisis: this is not a quarrel in a faraway land | Analysis

Britain’s huge banking sector will find itself on the frontline if Greek voters reject austerity, says Heather Stewart

In September 1938, Neville Chamberlain described the growing conflict between Germany and Czechoslovakia as “a quarrel in a faraway country between people of whom we know nothing”. It would be easy to think much the same about the crisis in Greece, but, be assured, that would be as mistaken as Chamberlain was then.

The centre of this crisis – Athens – may be 1,500 miles from Britain, but the shockwaves would arrive in the UK pretty swiftly. Britain’s huge banking sector will find itself on the frontline if Greek voters reject austerity and the country dives out of the single currency.

Many banks have shrewdly slashed their direct exposure to Athens over the past 12 months; but the impact of a “Grexit” would be much broader than a drop in the value of Greek bonds. It could hit lending, force up the rates banks charge for finance and make life far more difficult for the exporters so key to recovery.

Italy and Spain (countries in which British banks are far more exposed) have struggled to convince the markets they are capable of tackling their debt mountains and it is likely they would come under intense pressure. Their borrowing costs would spike as investors fretted about another country following Greece towards the exit and spiralling bond yields can rapidly turn a tricky budgetary situation into a full-blown fiscal crisis. Bailed-out Portugal and Ireland would also come under renewed pressure.

As banks across the continent tried to assess their own and each other’s exposure to this kaleidoscope of risks, there would be a severe threat to the entire European financial sector.

Britain’s financial institutions, owing to their sheer size and heavy international exposure, would find it impossible to escape the collateral damage from a euro meltdown. That would inevitably push up borrowing costs for firms and consumers on this side of the Channel – including mortgages, for example – and could even leave some British banks in need of more government help.

The second route through which the effects of a Greek departure from the euro would arrive in the UK is via slumping overseas trade. Despite the exhortations of Vince Cable and other ministers for Britain’s firms to focus on opening up new markets in Asia and Latin America, Europe still accounts for around half of British exports.

Ironically, given that George Osborne has sketched out his position in sharp opposition to his “feckless” European colleagues, rising exports to eurozone countries were one of the few bright spots in the UK’s dismal economic performance over the past 12 months. But with the eurozone sliding into recession, sales to the worst-hit countries are now in decline. The latest official figures showed an 8% fall in exports to Spain, and a 7% drop to Italy over the three months to March. That effect will only worsen in the coming months, as the economic downturn deepens, driven by political chaos and plunging business and consumer confidence.

The effect of declining demand from these struggling economies on the UK is likely to be compounded by a rise in the value of sterling against the euro, as investors flee the troubled single currency and seek the safety of alternatives, including the pound, undermining the efforts of exporters.

All this will be hitting an economy that had been flatlining for 18 months, and has now tumbled into the first double-dip recession in decades. While it admits to drawing up contingency plans for the event of a euro collapse, the Bank of England has conspicuously refused to publish estimates of the economic consequences for the UK.

However, independent analysts have been less wary of making predictions; and the consensus is that if the euro implodes, the recession will be longer, deeper and more painful than anyone could have predicted.

Danny Gabay, of Fathom Consulting, for example, predicts that the impact of a euro breakup on the economy would be “roughly half as bad again” as the collapse of Lehman Brothers.

Greece’s interim government sworn in before fresh election

Judge Panagiotis Pikramenos heads administration faced with heighten concerns over Athens’ ability to remain in the euro

A caretaker government led by a high-court judge took charge of Greece on Wednesday – 10 days after it was plunged into chaos by an inconclusive poll – with the express aim of steering it to fresh elections.

The interim administration was sworn in amid heightened fears over Athens’ ability to remain in the euro. The president, Karolos Papoulias, warned this week of “fear that could develop into panic” as Greek banks were drained of deposits.

“Thank you for your trust,” the country’s new prime minister, Panagiotis Pikramenos, said as he met Papoulias. “This is purely a caretaker government, but it escapes no one that our country is going through difficult times. We must safeguard its prestige and ensure a smooth transition.”

The 67-year-old judge, who replaces Lucas Papademos, the former central banker who has been in charge of an emergency left-right coalition government for the past six months, will hold the reins of power until 17 June, when Greeks return to the ballot box. With debt-stricken Athens reliant on rescue loans from the EU and IMF, the vote’s outcome will determine whether the country remains in the euro.

Before the electoral campaign has officially begun, battle lines have been drawn between those who believe the punishing austerity cuts are a price worth paying, and those who want the “barbaric” EU-mandated measures revoked. Fury over successive waves of belt-tightening – blamed for unprecedented levels of unemployment and poverty – prompted nearly 70% of Greeks to vote for anti-bailout parties on 6 May.

“It promises to be a very tense, very bitter electoral campaign,” said political commentator Nikos Evangelatos. “All parties want the terms to be revised.”

The battle has dramatically reconfigured Greece’s political scene. On one side are Pasok and New Democracy, formerly mainstream forces whose support base was shattered at the last election as they were blamed for enforcing draconian spending cuts. Although long-time rivals on the left and right of the political spectrum, they are now referred to as centrist and pro-European.

On the other side lies an array of anti-austerity groups lead by Syriza, a leftwing alliance of radicals whose popularity has rocketed, fuelled by anger over cuts.

Successive polls have shown Syriza, the surprise runner up in the last elections, consolidating its gains.

Alexis Tsipras, the former student radical who leads the party, has called the latest €130bn rescue plan “barbaric” and “an agreement of poverty and wretchedness”. On the eve of the 6 May poll, he told the Guardian that the German chancellor Angela Merkel “should worry” if Syriza ever came to power. “We don’t want to leave the euro but we want to cancel the accord which denies people basic rights and is totally unfair,” he said.

On Tuesday, following the collapse of last-ditch negotiations to form a national unity government to navigate Greece through to European elections in 2014, Tsipras claimed that the EU, led by Berlin, was engaged in a high-stakes game of bluff. The threat to “accept more austerity or exit the eurozone” would never happen because the eurozone itself had far too much to lose.

“[Jean-Claude] Junker said it himself,” he said referring to statements made by the euro group chairman this week. “There is no question of Greece ever leaving [the bloc].”

His opponents brand Tsipras naive, a politician with a schoolboy knowledge of economics who gained power on the strength of false promises to Greeks.

“But there is no doubt that the left has the momentum, the upper hand,” said Dimitris Keridis, a political scientist at Panteion University in Athens. “It has capitalised on the anti-austerity argument, unlike the pro-European forces which should have made it much clearer what was at stake,” he said. “This time round they have to be much more focused in making the argument that it might be bad now but it will be much, much worse if Greece leaves the euro.”

On Wednesday, the outgoing finance minister, Filippos Sachinidis, said the stakes were higher than they had ever been. Greeks were faced with a choice and either way it would not be easy.

“The [June] election will decide whether we Greeks want to be in the euro zone,” he said in a radio interview. “When there are political forces that are saying it won’t be so bad to return to the drachma, it is the equivalent of saying we should leave the eurozone.

“It is our choice, our decision, but if we do that [reject the single currency] we will go back decades. All our achievements will be wiped out and it will happen in such a violent way I don’t know if we will be able to continue functioning as a modern democracy.”

UK banks readying for Greek euro exit

Financial institution have been preparing since November, reducing exposure, with drachma trading facility ready if needed

Britain’s financial firms are dusting down contingency plans for a Greek exit from the euro – an event that the head of the International Monetary Fund said could be “quite messy”.

Banks in the UK have been making preparations since at least November when the Financial Services Authority’s top regulator, Andrew Bailey, told banks: “We must not ignore the prospect of the disorderly departure of some countries from the eurozone.”

ICAP, the City currency broker, is ready to reintroduce a drachma trading facility by installing a new panel on its electronic screens. Michael Spencer, its chief executive, said: “I don’t think it’s going to happen in the next week but I think it’s going to happen.”

He dismissed concerns about the entire eurozone breaking up but said other countries might leave and a Greek exit “needs to be organised … sensibly”.

While the timing of any exit is not clear, banks are assuming a decision would be made quickly as the country would need to close down its borders and its banks to stop funds flooding out of the country.

UK banks have taken steps to reduce their exposure to Greek government bonds and other loans and allow customers in Greece to keep using their credit cards.

One unknown is exactly how the Greek currency would be denoted in the payment system that works behind the scenes to move money electronically around the world – known as Swift (Society for Worldwide Interbank Financial Telecommunication). The decision lies with the International Standards Organisation.

When Greece joined the euro the drachma had been known as GRD and identified by the numeric code 300. Some bankers hope the new code will be different to ensure computers do not pick up any legacy information. Despite requests by banks for the notification of the code, no decision will be made until a formal request by Greece. Then, a decision will be made within hours.

The hope is that a departure from the eurozone would happen over a weekend, allowing each of the UK’s major banks to deploy hundreds of people to switch over computer systems to allow them to handle the Greek drachma again.

Banks have attempted to cushion the initial impact by selling off their Greek government bonds and reducing their exposure to corporate loans. Legal documents have been checked to ensure loans are written in English law rather than Greek law, permitting payments to continue in euros rather than the new drachma, which is expected to lose at least 50% of its value instantly. Greece joined the single currency at a rate of 350 drachma to the euro.

While the computers can be reprogrammed, meeting demands from customers walking to branches to ask for drachma notes will be difficult as the currency will be controlled by Greece’s central bank. Unless officials have been secretly printing drachma notes, the fastest solution could be to stamp drachma or some such symbol across existing euro notes – although Greek shopkeepers and merchants may well be keener to accept clean euros rather than mock drachmas.

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