A spokesman for the European Commission acknowledged Tuesday that discussions were underway on how to prepare for a Greek exit from the eurozone, but he denied that an actual contingency plan exists.
"We are not aware about any plans … some people are working on scenarios, we are providing information about EU laws as the guardian of the treaties," Olivier Bailly said in Brussels
"The Commission is not working on a Greek exit plan," he said.
"We're working on one plan and one plan only and that's to keep Greece in the eurozone."
At the same time, the leader of Greece’s radical left-wing Syriza party insisted on Tuesday that the continued implementation of the country's bailout conditions would be catastrophic for a country already mired in a deep recession.
Alexis Tsipras, whose party came a surprise second in inconclusive May 6 elections and is viewed as having a strong chance of winning a second vote to be held Sunday, has vowed to cancel Greece's international bailout agreement if he wins.
Angered by the seemingly endless pain, Greeks turned away from the two traditional parties — conservative New Democracy and socialist PASOK — in elections last month. They voted instead for more radical parties that have vowed to pull the country out of its bailout and austerity agreements.
Tsipras has said the austerity the country has been forced to impose in return for billions of euros in rescue loans was leading Greece towards collapse.
If Greece reneges on its pledges to reform its economy, the other European countries and International Monetary Fund who have extended it billions of euros in rescue loans could pull the plug on the funding.
The fear is that would force the country out of Europe's joint currency, although how that would happen is not clear, given there are no EU procedures in place to pushing any country out.
And if Greece did elect to leave on its own, the process presumably would take months, given that it is how long it would take to print enough of its own currency. What would happen in the meantime, in terms of capital fleeing the country, is also unknown.
Financial markets worry that a Greek exit would leave the European banks that hold much of the continent's government bonds significantly weaker and more reluctant to lend to one another.
This could spark off a credit crunch like the one that followed the collapse of the U.S. investment bank Lehman Brothers.
No measures to stem capital flight
The problem could be made even worse by savers and investors taking money out of banks in shaky economies and moving it to safer countries such as Germany or even out of the eurozone altogether, further destabilizing the banking system.
Asked about measures that could be used to stem a flight of capital from the country, the EC’s Bailly said that the EU rules say that can’t be done for economic reasons only.
"There is a possibility for member states to restrict movement of capital in specific cases relating to public order and public security," Bailly told reporters.
Tsipras said he hoped to convince European leaders that a Greek exit would pose a danger to the continued existence of the 17-nation joint currency itself.
"If one of the 17 countries is brought to collapse ... the fire will become unquenchable and will not be limited to Greece and the southern countries ... it will break up the eurozone and that will not be in anybody's interests," he said during a news conference.
Burdened by a massive debt and huge budget deficit, Greece has been dependent on the EU-IMF rescue loans since May 2010, when it became locked out of the international market for long-term borrowing by sky-high interest rates.
The country has continued raising small amounts through short-term sales. On Tuesday, it raised €1.625 billion ($2.1 billion Cdn) in an auction of six-month treasury bills, but at a relatively hefty interest rate of 4.73 per cent, up from 4.69 in a similar debt sale on May 8.