Sean O'Grady: It's not the loans, it's contagion we fear

Analysis: There has been some anecdotal evidence that UK banks are preparing to cut their loans to Greek entities
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The Independent Online

British Government ministers are anxious to stress that the UK has not been asked – and nor would it agree – to contribute directly to any new bailout for Greece.

The Foreign Secretary, William Hague, said: "Our view is that any such support for Greece is for the eurozone and for the IMF, not the UK." Danny Alexander, Chief Secretary to the Treasury, added: "There's simply no proposition on the table for the UK to contribute beyond International Monetary Fund involvement, and I don't expect there to be one."

The Chancellor, George Osborne, made clear at a meeting of EU finance ministers in Luxembourg that the UK does not want to be part of any new aid package for the Greek economy.

However, this pledge only refers to a new rescue, a "successor deal" to the €110bn (£97bn) disbursed in May last year. It does not affect the UK's commitment to lend to Greece under the terms of that older deal, agreed by the last Labour chancellor, Alistair Darling, under crisis conditions.

Britain is also lending funds to the two other distressed peripheral economies of Ireland and Portugal. These UK commitments arise from two indirect mechanisms.

First, the UK is a member of a relatively small (€60bn) fund called the European Financial Stability Mechanism. This is designed to help all EU members, not just those in the euro, in case of financial or natural disasters. Before the formation of the current European Financial Stability Fund – which involves the 17 members of the euro only and approached €1 trillion when established – the EFSM was tapped to help in the Greek rescue, and it again chipped in to the Portuguese and Irish rescues. However its original funding has now been whittled down to just €12bn, and the UK would only have to back bonds issued by it to the tune of around €1.6bn in future. However the political reality appears to be that even this will not be required, at least in the case of the next Greek bailout.

In the case of Ireland, the UK made an additional independent bilateral loan of £3.2bn in recognition of the closeness of the two economies.

The UK also has an obligation to rescue Greece via our IMF membership, just as with other nations in trouble, from Ukraine to Pakistan. With Greece, as with the others, the UK is liable for 4.5 per cent of any loans, so for another €120bn Greek rescue, this would amount to €5.4bn.

Much more significant – for the UK and the wider world – is the damage that could reverberate throughout the financial system if Greece was to default on its debts.

While British banks have relatively modest exposures to Greek government bonds and make few loans to Greek businesses, French, German and other institutions do much more business there, both directly and via subsidiary banks. There has been some anecdotal evidence that UK banks are preparing to cut their loans to Greek entities, and this may be repeated across Europe. More dangerous still would be if the crisis spread once again to Portuguese, Irish, Spanish and Italian debts; such a "contagion" would be well beyond the resources of the EU to address, and would plunge the economy into a renewed recession. As the destination for 50 per cent of UK exports, the health of the eurozone economy is crucial to the UK's own recovery.

Potential losses to insurers and other banks, mostly American, that have guaranteed the value of Greek bonds are unknown, but estimates vary between €40bn and €130bn, and would add to the chaos. Such sums have sparked fears of a second credit crunch and another meltdown like the one that followed the collapse of the Lehman Brothers investment bank in September 2008.

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