Greece shakes the markets again as Bank warns of eurozone shocks

Fears that the Greek government may soon have to tap its €110bn eurozone/IMF rescue package sent the cost of insuring Greek government bonds against default soaring to record highs yesterday – and hit UK banks shares in London badly, thanks to the "contagion" factor.

The latest crisis to hit the eurozone's financial system came as the Bank of England warned that the British banks remained vulnerable to shocks from the single currency area, and faced an £850bn funding gap over the next few years, the largest among the advanced economies.

The Bank said: "Banks' long-term credit ratings benefit from the implicit support given by governments. A broad-based rise in sovereign risk concerns would reduce the perceived value of such support to banking systems. This would tend to put downward pressure on banks' credit ratings. UK banks are among those vulnerable to these pressures."

At more than 10 percentage points the credit default swap premia – in effect an insurance premium on Greek government bonds – yesterday spiked higher even than it did during the May crisis. It signals the near-certainty among market players that a Greek default, or "restructuring" is inevitable and may arrive sooner than expected. The imminent withdrawal of one of the European Central Bank's special schemes has apparently spooked investors.

As has happened frequently before, the euro was pushed sharply down against the dollar on fears that the "contagion" may spread. Sterling reached a 19-month high against the euro: Spanish CDS also went higher yesterday.

Greece is framing legislation to set up a €10bn (£8bn) euro support mechanism to bail out her banks if, as is virtually certain, they cannot raise funding on the international markets in the conventional way, especially now that 12-month ECB funding facility is due to be wound down on 1 July. The €10bn would come from the €110bn emergency loan package from the IMF and Greece's eurozone partners. "The purpose is not to provide liquidity support," the Deputy Finance Minister Philippos Sachinidis told MPs. "The aim of this initiative is to deal with a collateral problem... the banking system is facing the backwash of the fiscal crisis."

Mr Sachinidis said that the €10bn will be sufficient to accommodate any losses under stress-test scenarios, due to be published by the European authorities for banks across the Continent, a move welcomed by the Bank of England as an important step towards confidence-building and transparency and confidence-building.

In its Financial Stability Report, the Bank said: "UK banks need to maintain resilience in a difficult environment, while refinancing substantial sums of funding; they have a collective interest in providing sufficient lending to support economic recovery; and they will need over time to build larger buffers of capital meet more demanding future regulatory requirements".

Some £850bn in refinancing will need to be found by 2012, at a time when official support such as the Special Liquidity Scheme is being ended.

The new Basel rules, say the Bank, will be agreed in the autumn, but the Bank favours a gradual transition.

The possibility of a European financial conflagration is edging closer – and could be more serious than the 2008 post-Lehmans collapse, given that sovereign debt and government borrowing helped trigger this crisis in the first place and makes state-sponsored bank rescues much less credible or likely.

Start your day with The Independent, sign up for daily news emails
Arts and Entertainment
Lou Reed distorted the truth about his upbringing, and since his death in 2013, biographers and memoirists have added to the myths
musicThe truth about Lou Reed's upbringing beyond the biographers' and memoirists' myths
Ed Miliband received a warm welcome in Chester
election 2015
Life and Style
Apple CEO Tim Cook announces the Apple Watch during an Apple special even
fashionIs the Apple Watch for you? Well, it depends if you want it for the fitness tech, or for the style
ebooksA special investigation by Andy McSmith
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + OTE £45,000: SThree: SThree Group have been well e...

Ashdown Group: IT Manager / Development Manager - NW London - £58k + 15% bonus

£50000 - £667000 per annum + excellent benefits : Ashdown Group: IT Manager / ...

Recruitment Genius: Sales Consultant / Telemarketer - OTE £20,000

£13000 - £20000 per annum: Recruitment Genius: Scotland's leading life insuran...

Ashdown Group: Training Programme Manager - City, London

£40000 - £45000 per annum + benefits : Ashdown Group: Training Programme Manag...

Day In a Page

NHS struggling to monitor the safety and efficacy of its services outsourced to private providers

Who's monitoring the outsourced NHS services?

A report finds that private firms are not being properly assessed for their quality of care
Zac Goldsmith: 'I'll trigger a by-election over Heathrow'

Zac Goldsmith: 'I'll trigger a by-election over Heathrow'

The Tory MP said he did not want to stand again unless his party's manifesto ruled out a third runway. But he's doing so. Watch this space
How do Greek voters feel about Syriza's backtracking on its anti-austerity pledge?

How do Greeks feel about Syriza?

Five voters from different backgrounds tell us what they expect from Syriza's charismatic leader Alexis Tsipras
From Iraq to Libya and Syria: The wars that come back to haunt us

The wars that come back to haunt us

David Cameron should not escape blame for his role in conflicts that are still raging, argues Patrick Cockburn
Sam Baker and Lauren Laverne: Too busy to surf? Head to The Pool

Too busy to surf? Head to The Pool

A new website is trying to declutter the internet to help busy women. Holly Williams meets the founders
Heston Blumenthal to cook up a spice odyssey for British astronaut manning the International Space Station

UK's Major Tum to blast off on a spice odyssey

Nothing but the best for British astronaut as chef Heston Blumenthal cooks up his rations
John Harrison's 'longitude' clock sets new record - 300 years on

‘Longitude’ clock sets new record - 300 years on

Greenwich horologists celebrate as it keeps to within a second of real time over a 100-day test
Fears in the US of being outgunned in the vital propaganda wars by Russia, China - and even Isis - have prompted a rethink on overseas broadcasters

Let the propaganda wars begin - again

'Accurate, objective, comprehensive': that was Voice of America's creed, but now its masters want it to promote US policy, reports Rupert Cornwell
Why Japan's incredible long-distance runners will never win the London Marathon

Japan's incredible long-distance runners

Every year, Japanese long-distance runners post some of the world's fastest times – yet, come next weekend, not a single elite competitor from the country will be at the London Marathon
Why does Tom Drury remain the greatest writer you've never heard of?

Tom Drury: The quiet American

His debut was considered one of the finest novels of the past 50 years, and he is every bit the equal of his contemporaries, Jonathan Franzen, Dave Eggers and David Foster Wallace
You should judge a person by how they peel a potato

You should judge a person by how they peel a potato

Dave Hax's domestic tips are reminiscent of George Orwell's tea routine. The world might need revolution, but we like to sweat the small stuff, says DJ Taylor
Beige is back: The drab car colours of the 1970s are proving popular again

Beige to the future

Flares and flounce are back on catwalks but a revival in ’70s car paintjobs was a stack-heeled step too far – until now
Bill Granger recipes: Our chef's dishes highlight the delicate essence of fresh cheeses

Bill Granger cooks with fresh cheeses

More delicate on the palate, milder, fresh cheeses can also be kinder to the waistline
Aston Villa vs Liverpool: 'This FA Cup run has been wonderful,' says veteran Shay Given

Shay Given: 'This FA Cup run has been wonderful'

The Villa keeper has been overlooked for a long time and has unhappy memories of the national stadium – but he is savouring his chance to play at Wembley
Timeless drama of Championship race in league of its own - Michael Calvin

Michael Calvin's Last Word

Timeless drama of Championship race in league of its own