Ahead of yesterday’s referendum, Bank of England governor Mark Carney said during the Financial Stability Report press conference that Greece’s financial crisis was a threat to the UK’s financial stability, adding that the Bank was on full alert to take any action needed.
Some 61% of Greek people voted no to the eurozone’s terms to an extension of bailout funds unified under Prime Minister Alexis Tsipras, who maintains the IMF’s demands are unsustainable for his country.
While it is not certain the decision will result in Greece leaving the euro, a Grexit is the most likely next step, raising questions over how this will affect the global markets, the UK economy and its financial institutions.
UK bank exposure
Banks in the UK have a limited exposure to Greece. Gross Domestic Product (GDP) in the UK is £1.8trn while the exposure of UK domestic banks to Greece is £7.5bn, 0.4% of GDP, according to Datastream.
Its debt is owed mainly to institutions like the International Monetary Fund (IMF) and the European Central Bank (ECB) rather than banks, so any defaults would not be felt immediately through the banking system, but UK banks’ ties with Greece were minimal to begin with.
Economist Paul Marson from Monogram Invest, said the low level of Greek exposure should allow the Bank to easily manage any possible liquidity implications caused by Greece being unable to pay its debts.
He expects the impact on the willingness and ability of UK banks to lend would be close to zero assuming the ECB, the Bank of England and other banks maintain systemic liquidity, which he says is expected.
“In short it is not an issue for UK banks,” said Marson. “Barclays on its own has a balance sheet of approximately £1.3trn so the numbers involved are trivial.”
The UK finance sector may experience losses by being indirectly exposed to Greek banks. James Meadway, senior economist at the New Economics Foundation, said that British banks are more likely to have connections to France and Germany which may in turn be exposed to Greece. If one of these countries suffers losses there could be a ‘ripple effect’.
The Bank of England’s warning that it was ready to act should Greece’s debt position threaten the UK is a strong indicator that there is expected to be some fallout but how quickly this will come is uncertain.
Tony Ward, CEO of Clayton Euro Risk, thinks there is likely to be an immediate knee jerk reaction from the markets. “It will test the robustness of the British banking system because volatility like this creates swings in markets which are out of all proportion with the risks. Even though everyone has been staring at this for a long time the immediate post reaction could lead to a massive overreaction,” said Ward.
Impact on Bank Base Rate
A Grexit is expected to keep interest rates lower for longer than previous predictions. Ray Boulger, senior technical manager, John Charcol, said a Grexit is likely to cause an economic slowdown in the eurozone, and with Europe being one of the UK’s biggest export markets it may have a cooling effect on our own economy. This chain of events, says Boulger, would suggest that The Bank of England Monetary Policy Committee may want to maintain Bank Base Rate at its current low for longer than it otherwise might have done.
Benefits for the UK
If a Grexit does happen, after the initial expected market fluctuations, the UK may stand to benefit from its position as an economy outside the euro and one with political stability.
Meadway says the political uncertainty which will follow a Greek exit could work in Britain’s favour. “If it is possible for Greece to leave the eurozone then it will spark speculation around who goes next, bringing the entire structure of the eurozone into question,” he says. “The general uncertainty and fear about the state of the world makes Britain look like a pretty safe bet.”
