Greece tops G8 agenda as eurozone crisis snares Spain

Fears that debt-stricken Greece may be headed for a chaotic eurozone exit loomed large as President Barack Obama met other G8 leaders for crisis talks in the United States on Friday.

The Group of Eight top economies come together as Greece faces its second election in just six weeks, putting its eurozone future in doubt and dragging down Spain, where the government is struggling to keep its banks afloat.

"Time is clearly running out," London-based analysts Capital Economics warned in a note over Greece's continued political paralysis.

"If the government does not meet the conditions required to receive the next tranche of the bailout, it could run out of money before the end of the summer," they said, referring to Greece's EU-IMF loan lifeline.

"It has become obvious that the period up to the Greek elections will be volatile and nervous," said the debt research wing of Dutch bank ING.

"Speculation regarding a (Greek) eurozone exit will continue and there is hardly anything that can be done about it," they said.

European stock markets posted sharp losses, mirroring drops in Asia, though Madrid rose in an illustration of the extreme volatility at work.

Money flowed again into Germany, seen as the safest of bets against the risk of contagion from Greece, with investors worried that if Spain needs a bailout, the EU will be hard put to stump up enough rescue funding.

Ratings agency Moody's downgraded 16 Spanish banks late on Thursday, citing concerns over the crisis, while figures showed the economy slumped in recession and bank bad loans at an 18-year high.

Germany sought to be reassuring on Friday, saying it had no reason to doubt that Spain could help its banks without seeking outside aid -- the problem Ireland faced when it had to be bailed out in 2010.

German Chancellor Angela Merkel meanwhile called for a stable Greek government to be formed quickly after elections June 17 in a telephone call with President Carolos Papoulias on Friday.

Merkel "repeated the German position that we are waiting for the elections and that it is the wish of all European partners... that a government is formed as quickly as possible," a German spokesman said in Berlin.

In Athens, the prime minister's office said the chancellor had in addition suggested the holding of a referendum alongside the June 17 vote, apparently with the aim of making the poll absolutely decisive.

Merkel "conveyed thoughts on holding a referendum alongside the election, on the question of whether Greek citizens wish to remain in the eurozone," the premier's office said in a statement.

But Merkel's spokeswoman denied the report. "The information reported that the chancellor had suggested a referendum to the Greek President Carolos Papoulias is wrong," she said.

Greek voters rejected painful spending cuts in a May 6 poll and could do so again June 17, raising concerns about the fate of the latest 237 billion euros ($300 billion) EU-IMF bailout package.

In Washington French President Francois Hollande said Greece should remain in the eurozone as Obama noted after talks that the region was of "extraordinary importance" not only to the people of Europe but to the global economy.

Latest opinion polls in Greece showed meanwhile that the conservative New Democracy party, which supported the EU-IMF rescue terms, would have 23.1 percent of the vote, up from the 18.85 percent it won on May 6.

The radical left Syriza party, which opposes the deal, was on 21 percent, up from its second-place finish with 16.8 percent, with analysts expecting the vote to turn into a straight fight over Greece's future in the eurozone.

Many EU leaders insist that there can be no change to the terms of the debt deal but have also begun to allow some room for movement, especially as Hollande won power this month on a growth pledge.

European parliament chief Martin Schulz warned that a Greek exit from the eurozone could see its economy collapse in days, with untold consequences.

"Many people believe that it would be the end of a negative cycle but for me it would be the beginning of an even more negative cycle," Schulz told German radio from Athens.

"We are all in the same boat," Schulz added after a meeting with conservative leader Antonis Samaras.

In Athens, a caretaker government took office on Thursday after the May 6 vote left Greece in limbo.

Since there is no provision for an orderly exit from the 17-nation currency bloc, the prospect is for chaos if Athens cannot stick to the tough terms of the latest bailout deal.

Panagiotis Pikrammenos, 67, Greece's caretaker premier, told his colleagues: "We must not forget that all of Europe is watching us... The country must honour the obligations it has undertaken."

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