IMF chief warns of high cost of Greek exit from euro

IMF chief Christine Lagarde warned of \"extremely expensive\" consequences were Greece to leave the euro zone, a once taboo possibility that European leaders have begun to discuss openly after the nation descended into political chaos. Fears that Greece\'s dire state could drag the euro zone deeper into crisis rattled financial markets across the globe, as a little-known judge was installed to head an emergency government which will lead the nation to new elections on June 17. Lagarde on Wednesday called on Greek leaders to show their resolve to keep the country in the euro by sticking to its bailout deal with the International Monetary Fund and European Union, the terms of which have inflicted great suffering on its people. However, she told Dutch television that any Greek departure from the euro \"would be extremely expensive and hard, and not just for Greece\". Greece\'s economic crisis turned into a full political crisis after an inconclusive election on May 6 when parties opposed to the austerity terms of the 130-billion-euro ($168 billion) bailout made strong gains, raising the chance that the rescue funds could be halted, pushing the country towards bankruptcy and out of the euro. A failure of pro- and anti-bailout parties to agree a coalition forced President Karolos Papoulias to call the second election in as many months, and prompted him to say that the chaos risked causing panic and a run on bank deposits. The IMF\'s sister organisation, the World Bank, said the crisis could spread beyond Greek borders to far bigger euro zone economies that are in trouble. \"The core question will be not Greece, but Spain and Italy,\" World Bank President Robert Zoellick said. If Greece left the euro zone, the ripple effects could be very damaging and reminiscent of when Lehman Brothers investment bank collapsed in 2008, spreading panic on global financial markets. In a blow to confidence, the European Central Bank said it had halted liquidity operations with some Greek banks because their capital was too depleted. That means they can no longer offer assets to the ECB as collateral for loans, and would have to seek costlier emergency financing from the Bank of Greece. It was not immediately clear which banks, or how many of them, were affected. One person familiar with the matter said the capital of four Greek banks was so low that they were operating with negative equity. Greeks have withdrawn hundreds of millions of euros from banks in recent days as the fears grow that the country might be forced out of the euro zone, although there has been no sign of a run on Athens bank branches. ECB President Mario Draghi said that under the EU treaty, it wasn\'t his job to decide what happened to Greece.