As I am sure you are aware on Tuesday Evening Greece defaulted as it was unable to repay €1.6bn due to the International Monetary Fund. Discussions with its creditors and austerity measures put in place have failed to yield the cash necessary to keep the country afloat. This leaves Greece in a position of potentially having to leave the Euro and revert back to a national currency.
As the UK is not a member of the Euro, only about 5% of the €25bn of the total amount owed to the IMF was originally funded by the UK. Other than the direct consequence of the default this may, however, have a number of impacts on the UK economy;
- Trade and The Euro
Although direct trade with Greece is relatively small, Europe accounts for around half of the UK’s exports. The relative strength of the Pound against the Euro has already made it harder for UK manufacturers to compete as it has made the value of goods and services relatively more expensive. The exit of Greece could cause a further collapse in the value of the Euro and diminish business confidence in the area.
- Impact on Other Struggling Countries
Greece is not the only country in Europe that is struggling with debt, in particular, Italy and Portugal have high levels of public debt to national economic output. Economists fear that an exit by Greece could trigger ‘contagion’ as investors panic and seek to withdraw money from other fragile economies. This could lead to problems in these countries similar to those currently faced by Greece. The granting of an extension also means that a borrower would be controlling the market for debt (rather than the sellers). This could cause other countries to follow suit and re-consider how they manage their own debts. Some do feel however that this would have a minimal impact.
- Banks and The Financial Sector
Overall the UK has around £7.7bn tied up in loans to banks and businesses in Greece. Of UK high-street lenders HSBC has possibly the largest exposure with 22 branches in Greece. If Greece were to leave the Euro this would lead to a potentially complicated process in order to try to get this money out, particularly if Greece adopts a devalued currency.
- Large Businesses
Some UK companies have large operations directly in Greece particularly; Vodafone, Dixons Carphone, M&S and Unilever. An exit from the Euro would, therefore, have a direct detrimental impact on these companies’ financial results.
On Tuesday George Osborne warned ‘the Greek crisis has been with us for five years and is one of the biggest external economic risks to the British economy’
Negotiations with Greece remain ongoing in order to establish a more comprehensive bailout programme to secure Greece’s financial future. For now however, uncertainty has had a detrimental impact on the UK economy in general.
Should your finances or those of your business be affected by these events then it is important to seek professional financial advice in order to consider the range of options available and thus mitigate negative effects. One of our experienced practitioners would be more than happy to arrange a meeting, initially free of charge. Contact us.