The headquarters of Agricultural Bank of Greece SA in Athens. Economists say the European Central Bank needs to step in to guarantee deposits held by Greek banks to avoid a run on lenders. Kostas Tsironis / Bloomberg

Customers withdraw nearly 700m euros from financial institutions

Greek President Karolos Papoulias was told by the nation's central bank chief that financial institutions are worried about their survival as Greeks pull out euros amid a deepening political crisis.

Central bank head George Provopoulos told Papoulias that Greeks have withdrawn as much as 700 million euros ($891 million) and the situation could worsen, according to the transcript of the president's meeting with party leaders on Monday.

"Provopoulos told me that of course there's no panic but there's great fear which can evolve into panic," the president said.

Greece's future in the euro has been thrown into doubt by the political standoff following inconclusive May 6 elections. The president was forced to call for new elections on Tuesday. German Finance Minister Wolfgang Schaeuble said the next vote will be a referendum on whether Greece exits the euro, a move that would leave lenders to its government, businesses and households unsure of recouping their money.

The risk of a run on Greek banks is "a very serious problem", Yannis Ioannides, professor of economics at Tufts University in Massachusetts, told Bloomberg Television. He said the European Central Bank needs to guarantee deposits held by the region's lenders to guard against contagion. "That's the only way to kill a bank run: not words but deeds."

Banks in downtown in Athens were open as normal on Wednesday with no signs of unusual activity. Deposits by businesses and households held in Greek banks stood at 165.4 billion euros in March, according to the last available data from the Bank of Greece. In 2011, deposits declined 35.4 billion euros, or 17 percent.

Greek leaders will seek agreement on Wednesday on an interim government that will schedule new elections as early as June 10. Opinion polls suggest the Syriza party, which opposes the austerity measures pledged by Greece as part of an international bailout, may come in first place.

The 130-billion-euro bailout provided a 50-billion-euro fund to recapitalize banks after they reported losses from the country's debt restructuring, the largest ever. Government spokesman Pantelis Kapsis said he believed that the first phase of the recapitalization of the banks would be completed in coming days, in an interview on NET TV on Wednesday.

Out of cash

The country will run out of cash by early July if partners withhold their next aid payment. The European Financial Stability Facility on May 9 confirmed that a 5.2-billion-euro tranche will be released by the end of June, with 4.2 billion euros already disbursed on May 10. The remaining 1 billion euros will be released depending on Greece's financing needs.

The once-taboo issue of a Greek withdrawal or expulsion from the 17-nation currency union burst into the public debate last week, starting in Germany, Europe's biggest economy and the country that invented the euro's low-debt rules.