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The UK has few direct exposures to Greece. However, if Greece defaults on its debt, and perhaps leaves the eurozone, the UK would still stand to suffer indirectly from the fallout.
The UK’s most direct links with the eurozone are through trade, and a Greek default/exit would almost certainly have adverse effects on the Greek economy in the near-term. But Greece is the destination for only 0.5 per cent of the UK’s exports. Indeed, UK exports to Greece have already fallen heavily – exported goods values dropped by 12.5 per cent last year (and are about half their level at the start of 2009). But this did not stop overall exported goods values to the EU from rising by 12 per cent last year.
UK banks’ direct exposures to Greece are also small. Holdings of Greek government debt are just $1.8 billion (£1.1 billion) or so, equivalent to about 0.5 per cent of UK banks’ tier 1 capital and less than 0.1 per cent of UK GDP. Exposures to Greek banks are even smaller at $1 billion (£0.6 billion), while even exposures to the Greek private sector are a relatively small $8 billion (£5 billion).
However, UK banks have large indirect exposures to Greece, particularly via their exposures to French banks. French banks have exposures to Greece of $40 billion (£25 billion), over four times that of UK banks and equivalent to 1.5 per cent of French GDP. And UK banks have lent some $100 billion (£63 billion) to French banks, equivalent to almost a third of their tier 1 capital. Accordingly, concerns about these exposures could put further upward pressure on banks’ funding costs and hence borrowing rates for firms and households. New mortgage rates in the UK rose further last month.
What’s more, a Greek default would no doubt have adverse effects on business confidence and consumer confidence. Although uncertainty about Greece’s future would finally be resolved, fears of contagion would prolong any uncertainty about the long-term future of the rest of the eurozone.
Indeed, the UK has obviously suffered alongside global stock markets in the past few days. Although it remains above the levels seen last autumn, the FTSE 100 is now almost 500 points or 8 per cent below the near-6000 level it reached in March. The resulting dent to financial wealth obviously doesn’t aid the prospects for consumer spending.
Meanwhile, the UK’s exposures to other troubled peripheral eurozone economies are far bigger than those to Greece. So perhaps the biggest concern of a Greek exit is the contagion that could result for other countries like Spain or Italy. UK banks have been scaling back their exposures to the eurozone, with exposures to Spain and Italy at the end of last year half their level in 2007. Nonetheless, UK bank lending
to Greece, Portugal, Ireland, Italy and Spain still amounted to some $300 billion (£188 billion).
At least the UK is still being seen as a safe haven from the troubles in the eurozone, rather than part of them. We expect this to continue, helping to keep down UK government borrowing costs. However, the downside of this safe-haven status and any consequent further rise in the pound is of course a further reduction in UK exporters’ competitiveness.
