13th September 2011
The announcement of fresh austerity measures over the weekend was met with anger and skepticism. Seeking Alpha writes that whether the latest desperate measures will serve to float the sinking ship for a little while longer is questionable.
It appears to be becoming a question of when, not if, Greece defaults, and the havoc this would wreak on the economy. This prompted extra red warning flags to go up as banks' shares sank, and worries about their solvency will keep growing. It will be a vicious circle of fear, says David Stephenson of Money Week.
Yet for some time now Greece has been set on a downward spiral, with targets that were unable to be met, says Mindful Money economist blogger Shaun Richards – and a domino effect has been created.
Shaun writes on his blog: "I have written many times in the past that the targets were simply too optimistic and that Greece was in danger of a vicious circle where a deepening of her recession leads via lower tax revenue and higher state spending to a worse fiscal deficit which leads to more austerity measures to get back on target which leads to a deepening recession and repeat…"
He adds of the ‘domino effect': "There was a time that Greece and Ireland and Portugal were problems which official Euro zone communities could imply were relatively minor problems and suggest that they were similar to some of the weaker US states. As problems have increasingly surrounded Italy and Spain too this is now longer true even in Euro zone officials alternative version of reality."
James comments on the blog: "One of the reasons that we seem to have this endless replay of factors contributing to the vicious circle you so well describe above is that policy makers seem to keep repeating policies where they have failed in the past. For example: Cuts in Greece plus taxes with no monetary easing/possibility of currency re-alignment etc; QE wherever it happens. It didn't work last time, so let's try some more seems to be the mantra…"
But while there have been numerous reports on the impact on markets of a potential Greek default – what does this mean for Britain?
Greek default could have spiralling and ultimately crippling consequences of the UK economy, say commenters.
While a default may affect the Eurozone first, with France and Germany set to lose a vast amount of money, there will be considerable damage done to the United Kingdom as well.
Although France and Germany has the biggest stake in Greek banks, Britain is in a big way exposed to Greek debt, reports the Daily Mail.
For example, Barclays, HSBC and RBS have a combined total of £2.3 billion invested in the first bail out. If Greece was to default, the banks risk losing that money.
The Telegraph's economics editor Edmund Conway adds that the Eurozone is Britain's biggest trading partner.
He says: "While Britons can allow themselves some smugness that the country did not join the euro, and so was spared direct involvement in the crisis, the implied risks for the UK remain significant."
He adds: "Europe is the UK's biggest trading area; a crisis would undermine British exports…any sort of sovereign default would raise further questions about highly indebted, deeply imbalanced economies around the world. No prizes for guessing which green and pleasant land falls into this category."
Mindful Money blogger Gemma Godfrey, head of research and chairman of the investment committee at Credo Capital, says: "Although the UK has falling exposure to Greece itself directly, its role as a catalyst to spread the contagion shouldn't be underestimated. There are already rumours French banks are to be downgraded due to their Greek holdings, even before a default, and over 50% of UK banks' tier one capital (equity and cash held against possible losses) are exposed to France and Germany. In addition, if the crisis were to spread to Ireland, with $135bn exposure, banks would have serious issues they would struggle to overcome. With greater assets than UK GDP, growth and jobs are all at risk."
Azad Zangana, European Economist at Schroders, says that there are three ways that Greece defaulting will affect the UK economy: