Central banks of the world’s major economies prepared contingency plans to stabilise markets in case anti-austerity parties won elections in Greece on Sunday, June 17. Moreover, leaders of the G20 meet in Mexico on Monday, June 18 to discuss Europe’s debt crisis and clarify contributions to the pledged IMF‘s fund worth of $430 billion US. It is expected that additional cash injections into the financial system may calm public panic; however, could euro, the second largest reserve currency, be broken easily?
Prolonged political tensions in Greece intensified considerations whether it is able to meet bailout obligations. Moreover, it was announced that in the middle of May the ECB stopped providing liquidity to some Greek banks because of insufficient capitalization, overseas banks reduced reserves holdings in euro and Greeks rushed to withdraw money from domestic banks or transfer deposits to more stable ones. Euro deterioration to 1.24 against US Dollar last week and international mistrust in European currency strengthen the worst scenario – the end of euro.
It could be interesting to observe how European banks follow the news of deteriorating assets. Euro might collapse if European banks hurry to stabilize deteriorating assets by ridding of devaluated euro. However, the other scenario is also possible. Self market regulation mechanism may come into force and European currency may survive as long as European goods are traded in euro.