Financial markets are hastily making preparations for a Greek exit from the euro after a day of political and economic turmoil ended with Europe's policy elite admitting for the first time that it may prove impossible to keep the single currency intact.
With attempts in Athens to form a government after last week's election looking increasingly doomed, European leaders abandoned their taboo on talking about the possibility that Greece might have to leave the euro.
Shares, oil, and the euro were all sold heavily on Monday in anticipation that anti-austerity parties would garner support in a second Greek election likely to be held next month, bringing the row between Greece and its European creditors to a climax.
Critical talks are scheduled to continue in Athens between all party leaders, although President Karolos Papoulias's decision to prolong the negotiations came despite widespread signs the talks were heading towards collapse. He has until Thursday, when the Greek parliament reconvenes, to broker a deal.
The British chancellor, George Osborne, warned that the prospect of Greece crashing out of the euro was damaging economies across Europe.
Uncertainty over the future of struggling eurozone nations was having a "real impact" on growth, he said.
Speaking in Brussels, where he is attending talks over the crisis, Osborne criticised the "open speculation" by some eurozone members.
"The eurozone crisis is very serious and it's having a real impact on economic growth across the European continent, including in Britain, and it's the uncertainty that's causing the damage," he said.
"Of course countries have got to make difficult decisions about their public finances. We know that in Britain.
"But it's the open speculation from some members of the eurozone about the future of some countries in the eurozone which I think is doing real damage across the whole European economy."
Amid claims in the markets that politicians in Athens were playing a dangerous game of bluff, a potential schism in the monetary union saw borrowing costs for Spain and Italy rise over fears that contagion could spread from Greece through southern Europe. The City's FTSE 100 Index lost almost 2% of its value, dropping more than 100 points, and there were big falls in share prices in Paris, Frankfurt, Madrid and Athens.
Chris Towner, director of FX advisory services at currency traders HiFX, said: "The Greeks seem to be playing a game of chicken here, first of all putting party politics above sovereign interests and secondly in the bigger picture questioning whether the European Central Bank are bluffing when it comes to not offering them bailout money if they fail to form a government."
On Monday night city firms were making sure their computer-trading systems could cope with the return of the drachma, and were predicting that a "grey market" in a new Greek currency could be operating within the next few days.
But despite the market turmoil and the anti-austerity mood reflected in the elections in Greece and France, finance ministers meeting in Brussels insisted there could be no softening of the tough conditions that Athens agreed to last year in return for a $130bn rescue package financed by the EU and the IMF. The talks openly discussed the likelihood of Greece quitting or being kicked out of the euro, while also differing over whether Greece would also need to leave the EU.
Maria Fekter, the gaffe-prone Austrian finance minister, said there was no basis in EU law for a country leaving the single currency, but noted that the Lisbon Treaty included provision for a country departing from the EU.
Chancellor Angela Merkel of Germany, by contrast, stressed that Greece would "always" be in the EU, a statement interpreted as meaning it might not always be in the euro.
Following suggestions from Jean-Claude Juncker, the Luxembourg prime minister and eurogroup chairman, that Greece's debt reduction timetable should be relaxed, the Germans made clear that no such loosening could be permitted.
With central bankers across the eurozone openly discussing the pros and cons of a Greek departure, it appeared that the terms of the debate had shifted towards accepting the inevitability of a Greek exit. Talk of the impact of a return to the drachma was predominant, split between those who believed the fallout from an outright Greek default could be contained and those who thought that the knock-on effect, particularly in Spain, would shift the euro crisis into an entirely new dimension.
"The contagion risk would be far, far smaller than one and a half years ago," said the Dutch finance minister, Jan Kees de Jager, of the effect of a Greek exit. Others predicted the result would be "catastrophe".
The debate focused on the financial and banking impact of a country leaving the single currency, with little emphasis being given to the political, social, security or foreign policy implications.
The European Commission said: "We want Greece to stay in the euro." But it emphasised that Athens could only accomplish that by living up to the terms of the bailout bargain with the eurozone.
Markets are braced for figures due out on Tuesday to show that the eurozone is officially in a double dip recession, and fear that the events of the past few days will intensify the slump.
On Monday investors were seeking out safe havens, including German bonds and the pound, as they sold eurozone assets. The boss of PKO Bank Polski predicted that Europe was hurtling towards its Lehman moment, with Portugal, Spain, and Italy being dragged into the slipstream of a Greek exit.
Stephen Lewis, economist at Monument Securities, said: "It may well be that eurozone leaders would raise the threat of Greece being obliged to leave the eurozone if it fails to comply with bailout terms, so as to sway Greek voters to support pro-bailout parties. But if this threat were to be credible, the EU would have to start elaborating measures to facilitate Greece's departure from the eurozone well before the election took place. Otherwise, Greek voters would assume eurozone leaders were bluffing."
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