'Very real' threat that Greek contagion could spread to Britain

view gallery VIEW GALLERY

Ratings agency warns UK banks are vulnerable to eurozone crisis

The UK was warned yesterday that it is among the European Union states that faces the risk of contagion from the Greek crisis, with "very real, common threats" to its financial systems.

As a stunned Greece, still struggling to come to terms with the deaths of three people in protests on Wednesday, approved cuts to address its financial crisis, one of the leading credit ratings agencies said British banks were "vulnerable" to shocks of the kind now reverberating around the eurozone.

The Greek finance minister, George Papaconstantinou, urged parliament not to flinch from passing a widely-detested €30bn package of tax rises and spending cuts, imposed as a condition for €110bn of loans from the EU and International Monetary Fund.

George Papandreou, the Prime Minister, said Greeks faced a simple choice. "Today things are simple," he said. "Either we vote and implement the deal, or we condemn Greece to bankruptcy."

But Moodys, the credit rating agency warned Italy, Portugal, Spain, Ireland and the UK were at risk from investors turning their backs on government bonds. "Each of the banking systems faces different challenges, but the contagion risk could dilute these differences and impose very real, common threats on all of them." Markets are indicating a growing conviction that Portugal and even Spain may follow Greece into crisis, raising the chances of a break-up of the single currency.

In a joint letter released last night ahead of a summit of European leaders in Brussels today, Nicolas Sarkozy, the French President, and Angela Merkel, the German Chancellor, called for stronger budgetary oversight inside the eurozone. "We must first reinforce the economic governance of the euro area", they wrote. "The Greek government has committed to taking courageous measures. We fully support its determination and we are convinced that it will allow Greece to address its fiscal and economic challenges and restore market confidence."

The summit will consider tougher sanctions for countries that fail to keep their deficits under control.

But the lack of confidence by the markets in the political handling of the Greek crisis has sent the euro plunging to a 14-month low against the dollar to $1.27, a six-month low against the pound and an all-time low against the Swiss Franc. The FTSE-100 index of leading shares has fallen more than 5 per cent this week, mostly as a result of "contagion" worries. A Greek default is being talked of as the "New Lehmans", echoing the economic slaughter that followed the collapse of the Wall Street firm in September 2008.

Losses on Greek government bonds – which have become virtually unmarketable in the crisis, like the "toxic debts" that brought Wall Street and City firms down two years ago, could be catastrophic in the case of a default. According to the Bank for International Settlements, of the $240bn in Greek government bonds held by overseas investors, a substantial proportion is in the vaults of the French banks – $78bn. Germany's banks are next, on $45bn of exposure, with the British and Dutch banks following on $15bn and $12bn respectively. But those losses would be multiplied dramatically if the crisis spread. That would spark a second credit crunch, overwhelming already enfeebled banks and plunging the European economy into a deep recession.

While the direct losses facing British banks may be relatively small, they are closely enmeshed through the money markets to the continental banks whose potential losses are so much larger. Should suspicious banks refuse to lend to each other again, as they did in 2008, the consequences would be no less serious. Anecdotal evidence suggests Greek, and to a lesser extent Spanish and Portuguese banks are starting to be frozen out of international money markets, and that could be the sign of a wider meltdown.

Start your day with The Independent, sign up for daily news emails
Arts and Entertainment
Books should be for everyone, says Els, 8. Publisher Scholastic now agrees
booksAn eight-year-old saw a pirate book was ‘for boys’ and took on the publishers
Life and Style
Mary Beard received abuse after speaking positively on 'Question Time' about immigrant workers: 'When people say ridiculous, untrue and hurtful things, then I think you should call them out'
tech
Life and Style
Most mail-order brides are thought to come from Thailand, the Philippines and Romania
life
News
i100
Life and Style
tech
Voices
Margaret Thatcher, with her director of publicity Sir Gordon Reece, who helped her and the Tory Party to victory in 1979
voicesThe subject is being celebrated by the V&A museum, triggering some happy memories for former PR man DJ Taylor
ebooks
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
and  

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

iJobs Job Widget
iJobs Money & Business

Ashdown Group: Business Analyst - Financial Services - City, London

£50000 - £55000 per annum: Ashdown Group: Business Analyst - Financial Service...

SThree: Trainee Recruitment Consultant

£18000 - £23000 per annum + OTE £45K: SThree: At SThree, we like to be differe...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + competitive: SThree: Did you know? SThree is the o...

Recruitment Genius: Administrator - IFA Based

£22000 - £24000 per annum: Recruitment Genius: This is an opportunity to join ...

Day In a Page

General Election 2015: Chuka Umunna on the benefits of immigration, humility – and his leader Ed Miliband

Chuka Umunna: A virus of racism runs through Ukip

The shadow business secretary on the benefits of immigration, humility – and his leader Ed Miliband
Yemen crisis: This exotic war will soon become Europe's problem

Yemen's exotic war will soon affect Europe

Terrorism and boatloads of desperate migrants will be the outcome of the Saudi air campaign, says Patrick Cockburn
Marginal Streets project aims to document voters in the run-up to the General Election

Marginal Streets project documents voters

Independent photographers Joseph Fox and Orlando Gili are uploading two portraits of constituents to their website for each day of the campaign
Game of Thrones: Visit the real-life kingdom of Westeros to see where violent history ends and telly tourism begins

The real-life kingdom of Westeros

Is there something a little uncomfortable about Game of Thrones shooting in Northern Ireland?
How to survive a social-media mauling, by the tough women of Twitter

How to survive a Twitter mauling

Mary Beard, Caroline Criado-Perez, Louise Mensch, Bunny La Roche and Courtney Barrasford reveal how to trounce the trolls
Gallipoli centenary: At dawn, the young remember the young who perished in one of the First World War's bloodiest battles

At dawn, the young remember the young

A century ago, soldiers of the Empire – many no more than boys – spilt on to Gallipoli’s beaches. On this 100th Anzac Day, there are personal, poetic tributes to their sacrifice
Dissent is slowly building against the billions spent on presidential campaigns – even among politicians themselves

Follow the money as never before

Dissent is slowly building against the billions spent on presidential campaigns – even among politicians themselves, reports Rupert Cornwell
Samuel West interview: The actor and director on austerity, unionisation, and not mentioning his famous parents

Samuel West interview

The actor and director on austerity, unionisation, and not mentioning his famous parents
General Election 2015: Imagine if the leading political parties were fashion labels

Imagine if the leading political parties were fashion labels

Fashion editor, Alexander Fury, on what the leaders' appearances tell us about them
Phumzile Mlambo-Ngcuka: Home can be the unsafest place for women

Phumzile Mlambo-Ngcuka: Home can be the unsafest place for women

The architect of the HeForShe movement and head of UN Women on the world's failure to combat domestic violence
Public relations as 'art'? Surely not

Confessions of a former PR man

The 'art' of public relations is being celebrated by the V&A museum, triggering some happy memories for DJ Taylor
Bill Granger recipes: Our chef succumbs to his sugar cravings with super-luxurious sweet treats

Bill Granger's luxurious sweet treats

Our chef loves to stop for 30 minutes to catch up on the day's gossip, while nibbling on something sweet
London Marathon 2015: Paula Radcliffe and the mother of all goodbyes

The mother of all goodbyes

Paula Radcliffe's farewell to the London Marathon will be a family affair
Everton vs Manchester United: Steven Naismith demands 'better' if Toffees are to upset the odds against United

Steven Naismith: 'We know we must do better'

The Everton forward explains the reasons behind club's decline this season
Arsenal vs Chelsea: Praise to Arsene Wenger for having the courage of his convictions

Michael Calvin's Last Word

Praise to Wenger for having the courage of his convictions