The European Commission has proposed the use of a controversial European Union fund called the European Financial Stability Mechanism to lend Greece €7 billion in short-term financing, against the wishes of European nations that do not use the euro.
A proposal leaked to Reuters said the loan would only be for three months, until a third bailout package from the eurozone is agreed.
The proposal comes after George Osborne publicly opposed use of the EFSM.
Even a short term loan would raise serious questions over the UK's relationship with the EU. The broken agreement would be ammunition for anti-EU campaigners in the UK.
Osborne reportedly telephoned Brussels on Tuesday to say that it would not be acceptable for UK funding to be involved any kind of bailout.
A spokesperson from the Treasury said that eurozone leaders had received the message “loud and clear” that it would not be acceptable for the UK to give support for eurozone bailouts. “The idea that British taxpayers’ money is going to be on the line in this latest Greek deal is a non-starter,” the spokesperson said.
Osborne based his opposition on a pledged he secured in 2010 that the EFSM would not be used to bail out failing European nations. Lawyers in the EU have now said this is a political pledge and can be broken in extreme circumstances – like the potential default of a member of the EU.
Osborne may choose to fight the change and risk failing. Or he may choose to insert a guarantee into the short-term loan and claim that as a triumph. A British source told reporters: "We recognise Greece has a short-term problem with bridge financing and we want to be constructive if we can."