British ministers doubt that the €130bn (£109bn) bailout for Greece will prove enough to rescue the country's stricken economy and suspect it will eventually leave the euro.
Although David Cameron and George Osborne welcomed the deal in public, ministers and Treasury officials are sceptical about whether Greece will have the stomach for the painful austerity measures it requires – not least because an election is expected in April or May.
Several Conservative MPs called for Greece to quit the euro now so that it can devalue its currency, while Labour warned that the spending cuts involved in the EU deal could kill off any hope of the country returning to growth.
At a summit of EU leaders next week, Mr Cameron will call for a "big bazooka" to be fired by the European Central Bank (ECB) to prevent the problems afflicting Greece spreading to other eurozone nations. He said yesterday: "Greece has made its choice and we now have to focus on the next step, which is constructing a firewall which is large enough to prevent contagion within the eurozone... I think that's absolutely essential."
Downing Street said the EU bailout would not require any more British taxpayers' money to be channelled to the International Monetary Fund (IMF), which will supervise the Greek deal along with the ECB and the European Commission. However, Mr Osborne will discuss a longer term plan to boost the IMF's resources with fellow finance ministers from the G20 leading economies in Mexico this weekend. That could eventually see the UK contribute another £17bn to the IMF, some of which could help the eurozone countries.
Mr Osborne said yesterday the agreement with Greece was "real progress" but that the Greek people and political system now had to "deliver really difficult decisions". He added: "Hopefully we can all move on now and get the European economy growing." But Alistair Darling, his Labour predecessor as Chancellor, said he was "very sceptical" about the rescue plan, warning that Greece and other EU countries could soon be "back at the table" asking for more money.
"It had to be done but it does not get you out of the woods at all," Mr Darling said. "Even if Greece manages to do everything that has been asked of it, in eight years' time they will still have a debt of 120 per cent of their GDP. The second thing is, where are the policies that are going to get growth? If you don't get the growth, you don't get the income to get down your borrowing and therefore your debt."
Tory Eurosceptics said Labour politicians were giving a more honest assessment of Greece's prospects than the Government. Bernard Jenkin said Mr Cameron faced a dilemma: "I believe it is in our interests for the Prime Minister to advocate the orderly break-up of the euro, but of course he would be immediately fingered as the enemy number one if he did say that."
John Redwood, the former Cabinet minister, said: "I don't think Greece will hit those deficit targets. I think Greece should definitely leave [the euro]. I think Portugal should probably leave. I think they need to tidy it up, get rid of the worst cases and then defend the core."
In Brussels yesterday, the UK for the first time voted against formally signing off the EU's budget for 2010, after spending watchdogs declined to approve its accounts for the 17th year running.