As the value of bad loans held by the Spanish banking sector tops €148bn, Brighton & Hove City Council has withdrawn £4.5m on deposit with Spanish owned bank Santander UK amid growing worries about the Eurozone crisis. Greece is now just a sideshow; Spain will determine the fate of the Euro and, to a very large extent, the UK economy.
Greece returns to the polls on 17th June when the prospect of the left-wing Syriza Party getting enough votes to form a government will send shivers through the 17 members of the Eurozone. If Syriza fulfils its pledge to tear up the austerity agreement [which has delivered a giant €350bn bailout to Greece] in the face of German insistence that this is not negotiable, the country will exit the Euro possibly within weeks.
For the Greeks this will be a disaster of proportions unprecedented in a western country [see earlier story]. But whether it stays or it goes, the Greek people are facing decades of austerity starting with an immediate reduction in GDP of about 20% and soaring inflation and costing the wider Eurozone up to £630bn. If it all stops at Greece the problems for the Eurozone and the UK will be limited. The real problem is that, although this situation is a complete unknown, it seems increasingly unlikely that the contagion can be limited to Greece.
As far as the British economy [which is not part of the Euro] is concerned, if the eurozone collapses new currencies will be created [a new Drachma for instance] and they will float like our own pound. But the real impact is what happens in the financial sector and how that impinges on our economy, especially bank lending and the distinct possibility of a run on European banks.
In reality, the Eurozone has been suffering from a slow motion bank-run since early 2010, with deposits leaving the fringe countries and heading for stronger members. But this trend has accelerated now and people that don't have the wherwithal to transfer their money from shaky economies are withdrawing it and hoarding physical euros. Greek savers pulled €3bn from domestic accounts in just 10 days following the failed election earlier this month.
Countries don’t go bankrupt, just the institutions that lend to them but a run on a bank can rapidly escalate into a bank collapse and then a sovereign collapse. With this in mind, it is sobering to look at the UK banking sector’s exposure to the Eurozone.
The exposure of UK banks to Greek debt is a paltry £6bn but they in turn are highly exposed to French banks which are the biggest holders of Greek debt with an exposure of over £30bn. The Spanish economy, devastated by its punctured construction bubble, represents 15% of the Eurozone GDP and the exposure of British banks to its debt stands at £57bn. If the contagion spreads to Italy [representing 22% of Eurozone GDP] that would add a further £37bn to UK exposure; the banking sector would be looking at a repeat of the 2008 recession and the UK government’s plan to restore the country’s finances, based to a large extent on exports, would be in tatters. So too would the Euro.
World stock markets continue to fall heavily in response to the Euro crisis, with speculators assuming a disorderly default will happen sooner rather than later and the contagion will spread to Spain. The FTSE has lost £190bn off the value of the UK's biggest companies in the last month; but much of the devalued stock is still held in pension funds. Such losses do nothing to encourage UK businesses to invest some of the £700bn cash pile they are hoarding thus exacerbating the problem of a lack of growth in the economy.
Almost a year ago the Economic Partnership said that the Euro had started to unravel [see earlier story]; on June 17th it will more than likely enter the end game.
Read related items on: