text: 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 EU 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 EU 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." 
   
   • This article was amended on 23 May 2012. The orginal said a estimate put the cost of a disorderly collapse of the euro at 5% of eurozone GDP, about $1tn. That has been corrected to 5% of EU output. ||||| FRANKFURT A Greek exit from the euro zone could expose the European Central Bank and the currency bloc it seeks to protect to hundreds of billions of euros in losses, landing Germany and its partners with a crippling bill. 
   
   A Greek departure would take Europe into uncharted legal waters. The size of the burden other euro zone states could bear gives them a powerful incentive to keep Greece in the currency club. 
   
   With most of Greek's private creditors having taken heavy writedowns as part of the country's second, 130 billion euros bailout, it is estimated that the ECB, International Monetary Fund and euro zone nations hold approaching 200 billion of its debt. 
   
   "In the event of an exit, they (Greece) will default. And the loss given default will probably be very high, high enough to eliminate the ECB's capital," said Andrew Bosomworth, senior portfolio manager at asset manager Pimco. 
   
   "They might need recapitalization from governments, who are not exactly in the best position to provide additional capital." 
   
   Those are not the only losses the ECB and its national shareholders might face as is explained in detail below. 
   
   Even once Greece had left the currency club, the costs to the rest of the euro zone would continue to mount as it would probably be compelled to avert a complete Greek collapse and wider contagion. 
   
   "Large-scale ECB intervention would be necessary to stabilize the system, along with intervention from Germany, the European Stability Mechanism (ESM), its predecessor the European Financial Stability Facility (EFSF) and the IMF, potentially costing hundreds of billions of euros," said Georgios Tsapouris, investment strategist at Coutts. 
   
   The ECB, which has its own paid-in capital of 6.4 billion euros, is essentially a joint venture between the 17 euro zone national central banks (NCBs). Combined, the Eurosystem of euro zone central banks has capital and reserves of 86 billion euros. 
   
   The national central banks would divide up any losses between them according to the 'capital key' - the ECB's measure of countries' stakes in its financing based on economic size and population. Germany would bear the biggest loss, some 27 percent of the total. 
   
   France would take a big hit too. 
   
   A Greek exit from the euro zone could cost the French taxpayer up to 66.4 billion euros and saddle the country's banking system with 20 billion euros in lost loans, according to a study published on Tuesday by the IESEG School of Management in Lille. 
   
   Smaller countries with less robust national central banks than the German Bundesbank would likely be still harder hit in relative terms. 
   
   "The ECB and some of the NCBs with little loss-absorbing capital and reserves relative to their share of how a loss would be allocated across the Eurosystem would potentially see their capital and revaluation reserves written off," Bosomworth said. 
   
   However, with fresh Greek elections called for June 17 and an anti-bailout leftist party ahead in the polls, some within the EU's corridors of power wonder whether the show is worth keeping on the road. 
   
   "It's going to hurt, absolutely. But is it going to be lethal?" one EU diplomat said. "We have two bad choices, but one is worse than the other." 
   
   TRIPLE WHAMMY 
   
   The ECB and national central banks are exposed to Greece in three main ways: via Greek sovereign bonds the ECB holds, via Greek collateral they hold in return for ECB loans and via Greece's liabilities for transactions over the euro zone's TARGET2 payments system. 
   
   The ECB has spent about 38 billion euros on Greek government debt with a face value of about 50 billion euros. 
   
   Under a scenario described in German weekly Der Spiegel, the euro zone's EFSF bailout fund could be used in the event of a Greek default to continue funding Greece's debt obligations to the ECB. 
   
   However, this would eat into the resources of the 'firewall', eroding its capacity to help other euro zone states which might well need to be protected if a Greek exit sparked contagion. 
   
   An alternative scenario could see the national central banks turning to their governments to recapitalize the ECB. But going cap in hand to politicians for money they are desperately short of risks undermining the ECB's independence. 
   
   ECB loans to Greek banks are another way the central bank is exposed but in this case, although the ECB conducts these medium- and long-term lending operations (MROs and LTROs), the funds are distributed via the national central banks and carried on their balance sheets. 
   
   A Bank of Greece financial statement on its website showed that as of January 31 it had lent out some 15 billion euros in MROs and 58 billion euros in LTROs - a total of 73 billion. 
   
   It was holding 143 billion euros in assets eligible as collateral for euro zone monetary policy operations. 
   
   Berenberg Bank economist Christian Schulz said that in the event of a Greek exit these loans and most of the collateral may be converted into a new Greek currency. 
   
   "The ECB/Eurosystem would not bear the risk anymore," he added, noting that the Bank of Greece would instead be left with the - likely devalued - loans and collateral. 
   
   TARGET RISK 
   
   But any funds Greek banks had taken using ECB loan operations that had subsequently found their way out of Greece could pose a problem. These would be added to the Bank of Greece's liabilities under the TARGET2 payments system. 
   
   The Bank of Greece and other peripheral euro zone countries have built up liabilities within the euro zone's cross-border payment system, TARGET2, due to a net outflow of payments to other countries in the bloc, a trend exacerbated by the debt crisis. 
   
   The Bank of Greece's financial statement showed that as of January it was carrying TARGET2 liabilities of 107 billion euros - a sum that has likely remained around that level since and which represents a big potential problem for the other euro zone central banks. 
   
   "TARGET2 is the biggest risk if they really take that loss," said Schulz, adding that a Bank of Greece collapse would leave central banks remaining in the euro zone with a loss. 
   
   "But it's far from clear whether the full TARGET2 balance would be what Europe would lose," he added. 
   
   The ECB could monetize any net TARGET2 loss in the event of a Greek euro exit by printing money but that would come with an inflationary effect unpalatable to policymakers in Germany, the bloc's most powerful player. 
   
   Beyond the accounting implications for euro zone central banks is the systemic impact a Greek euro exit would have on the bloc's banking system. Savers in other periphery countries are likely to take flight. 
   
   "If they see that Greek savers have seen their euro savings overnight being converted into drachma, which could depreciate by 50-70 percent, then it would be a fairly simple hedge strategy for them to take out some of their savings and put them into Luxembourg, or pounds sterling, or Swiss francs," said Bosomworth. 
   
   Ultimately, Greece will decide whether it leaves the euro zone but the ECB can try to head off such a scenario. 
   
   ECB President Mario Draghi said on Wednesday that "our strong preference is that Greece will continue to stay in the euro zone". 
   
   "What they can do is try to prevent contagion - where they have a very significant role - and they will probably also try to convince participants on all sides to keep Greece in the euro area," said Citigroup economist Juergen Michels. 
   
   (Additional reporting by Sinead Cruise, writing by Paul Carrel, editing by Mike Peacock and Janet McBride) ||||| Greek Syriza leader Tsipras attacks EU and Merkel 
   
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   Greek left-wing leader Alexis Tsipras has accused the EU and German Chancellor Angela Merkel of "playing poker with European people's lives" by insisting on austerity measures. 
   
   Mr Tsipras' Syriza bloc is predicted to come first in new elections called for 17 June. Syriza wants to renegotiate Greece's international bailout. 
   
   At least 700m euros (£560m; $890m) was withdrawn from Greek banks in the week until Monday, the Greek president said. 
   
   But there are no signs of a bank run. 
   
   'Poverty and hardship' 
   
   In a BBC interview, Mr Tsipras said if the "disease of austerity destroys Greece, it will spread to the rest of Europe". 
   
   Banks were profiting at the expense of thousands of Europeans - in Spain and Italy, as well as Greece - left in poverty and hardship, he said. 
   
   "Therefore the European leadership and especially Mrs Merkel need to stop playing poker with the lives of people," Mr Tsipras said. 
   
   Syriza came second in inconclusive elections on 6 May, in which no party won a majority or was able to form a coalition. 
   
   Syriza refused to join any government which would continue with the austerity measures demanded by the EU and International Monetary Fund (IMF) in return for a bailout of 130bn euros ($170bn; £105bn). 
   
   Continue reading the main story Panagiotis Pikrammenos President of the Hellenic Supreme Administrative Court 
   
   Born in Athens in 1945 
   
   Studied law in Athens and Paris 
   
   Legal adviser to the Greek prime minister 1991-93 
   
   Also served as director of national school of judges Source: Greek Council of State 
   
   Final talks to form a government failed on Tuesday, raising new concerns over Greece's eurozone future. 
   
   Council of State president and judge Panagiotis Pikrammenos has been sworn in as interim prime minister to head a government until the elections next month. 
   
   Early Thursday, he appointed a senior finance ministry official, George Zanias, as the country's new finance minister and a former conservative minister, Petros Moliviatis, as foreign minister. 
   
   "It is clear to all that our homeland is going through difficult times," Mr Pikrammenos said after accepting the mandate from President Papoulias. 
   
   "We must safeguard its prestige and assure a smooth transition." 
   
   He joked that he had read in the press that the English translation of his name was "embittered" - making him suited to be the last prime minister of a political era. 
   
   The rest of the government will be sworn in on Thursday. 
   
   "[Greek central bank chief George] Provopoulos told me there was no panic, but there was great fear that could develop into a panic," President Karolos Papoulias was quoted as saying in minutes of talks on Tuesday with the political parties. 
   
   The Financial Times newspaper quotes Athens-based bankers as saying withdrawals exceeded 1.2bn euros on Monday and Tuesday - 0.75% of deposits. 
   
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   However, there were no signs of panic or queues outside banks in Athens on Wednesday. 
   
   European Central Bank (ECB) Governor Mario Draghi and Spanish Prime Minister Mariano Rajoy both said on Wednesday they wanted Greece to remain in the euro. 
   
   "I want to state that the governing council's strong preference is that Greece will continue to stay in the euro area," Mr Draghi said. 
   
   The Governor of the Bank of England, Sir Mervyn King, warned that the eurozone was "tearing itself apart" and the UK economy would not escape "unscathed". 
   
   He told a news conference that the euro area posed the greatest threat to the UK recovery, and there was a "risk of a storm heading our way from the continent". 
   
   The interim government will be sworn in on Thursday.
target: – Europe has hundreds of billions of reasons to try to keep Greece from unceremoniously ditching the eurozone. If Greece leaves, the rest of Europe would face catastrophic losses, Reuters reports. Greece would default on the roughly $250 billion in debt held by the ECB, IMF, and other eurozone nations, and that loss will likely be "high enough to eliminate the ECB's capital," one investor said. And the losses wouldn't end there because Europe would still probably have to prevent a total collapse or risk economic contagion. How bad could it get? One Guardian estimate puts the total cost at $1 trillion. But it's looking increasingly unlikely Greece will abide by its bailout deal; new elections are looming, and polls favor Alexis Tsipras' far-left party. In a BBC interview, Tsipras urged Europe, and particularly Angela Merkel, to "stop playing poker with the lives of people" by demanding such harsh austerity measures. That defiance has some European decision-makers pushing to rip the Band-Aid off and boot Greece. "It's going to hurt, absolutely," one diplomat tells Reuters. "But is it going to be lethal?"