Greece readies for polls as euro crisis hits Spain, Italy

(ATHENS) - A caretaker government took office in Greece Thursday to organise a second election in six weeks after an inconclusive May 6 vote as fears over a possible disorderly euro exit rocked Spain and Italy.

The last polls left Greece in limbo, pushing markets and the euro down sharply, and the new vote on June 17 offers no guarantee of a viable government able to implement an EU-IMF bailout which divided the country.

One opinion survey shows the radical leftist Syriza party, which wants to drop the deal and its austerity measures, in first place with 24.5 percent of the vote, up from its 16.8 percent showing on May 6 when it came second.

A Pulse poll for Pontiki satirical weekly said the conservative New Democracy party and the socialist Pasok, the mainstream parties who supported the EU-IMF debt rescue, would get 21.5 percent and 15.5 percent respectively.

The prospect of another inconclusive election, and of Greece's subsequent exit from the eurozone, prompted Fitch Ratings on Thursday to cut Greece to a 'CCC' rating that means its is vulnerable to default.

European stock markets fell, with Madrid and Milan down sharply after reports of a run on deposits at Spain's fourth largest lender Bankia hit the banks there and in Italy.

The euro hit fresh four-month lows against the dollar on fears the deteriorating situation in Spain, along with problems in Greece and Italy, were making the debt crisis in the 17-nation bloc more difficult to resolve.

Reports earlier this week of withdrawals worth 700 million euros ($890 million) from Greek banks on Monday had rattled markets similarly but a banking source Thursday downplayed their importance.

From the May 6 polls to Monday, there had been withdrawals of 800 million euros, the source said, noting that in March there was an inflow of 1.0 billion euros, with April estimated at the same amount.

The source, who asked not to be named, also said that 18 billion euros in funds due under the bailout for the recapitalisation of Greek banks was expected by Tuesday or Wednesday.

The EU and the International Monetary Fund, all that stand between Greece and a disorderly default and eurozone exit, have warned that no new funds will be released if progress on pledged reforms and austerity falters.

The IMF announced Thursday that it would hold off on official contacts with Greece until after the June 17 elections, which effectively delays a review upon which the next disbursement of 1.6 billion euros depends.

"We look forward to being in contact with the new government once it has been formed," IMF spokesman David Hawley said.

Fitch cited the prospect of another inconclusive election and Greece being forced out of the eurozone to cut its rating of Greece on Thursday to 'CCC'.

"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," the rating agency warned.

Outgoing Greek prime minister Lucas Papademos warned it would be "disastrous" for Athens to reject the EU-IMF bailout but it could seek adjustments.

"A unilateral rejection of the country's contractual obligations would be disastrous for Greece, leading unavoidably outside the euro and possibly outside the European Union," he said in an open letter.

"The decisions we take could seal Greece's course for decades," said Papademos, who took over as head of a technocrat government in November to ratify and put in place the EU-IMF bailout accord.

The caretaker government sworn in Thursday is led by Panagiotis Pikrammenos, 67, the head of Greece's top administrative court, and made up mainly of prominent university professors, a retired general and a diplomat.

"We must all work to steer the country to a safe harbour," Pikrammenos told the cabinet, adding that they would get no salary for their work and should set an example of frugality.

Many Greeks are in despair after two years of salary and pension cuts, which instead of bringing benefits has left the country mired in recession for a fifth year, triggering strikes and sometimes violent protests.

The latest twist in the Greek crisis comes as the focus switched to struggling Spain where the government is desperately trying to shore up a crippled banking system amid concerns it may need outside help to do so.

Reports of the run on deposits saw Bankia shares plunge nearly 28 percent.

The eurozone debt crisis has so far claimed Greece, Ireland and Portugal but the fear is that Europe's current rescue mechanisms would not be able to cope with a Spanish bailout, especially if Italy were to be in trouble too.

However, European leaders appeared to move Thursday towards resolving an emerging split over how to deal with the crisis, agreeing that both growth and cutting budget deficits are needed, speaking in a video-conference.

Adding growth measures to the new EU budget-cutting fiscal pact has been a key goal of new French President Francois Hollande.

Boosting central EU investment funds, as is under consideration, could provide a boost to Greece's struggling economy, which is in its fifth year of recession as both the government and households cut back on their spending.