Insular Views

15/07/2011 at 3:41 pm 1 comment

There is widespread recognition that the UK economy faces problems. Our growth is stagnant, prices are rising – and there are those cuts to contend with too. So the British MPs, journalists, economists and so on who argue that Greece and its peers must be allowed to default without further outside assistance from anyone (and certainly not from us) take an understandable line.

Understandable, but wrong.

Moody’s, fresh from junking Portugal the week before, turned its guns on the Irish this week. European debt markets, already nervous, took this badly: it wasn’t just Irish bonds, but those of Spain and Italy that moved lower. Even France saw the yield on its ten year paper gap to its highest spread over ten year Germany since the mid 1990s.

In the event that no further emergency lending is made available to the weaker eurozone countries, we should expect further rating downgrades and spread widening. The bond market, over time, would force the default of successive states by cutting off their access to funding.

We are a long way from that grim destination at present. A yield of 6% on Spanish ten year bonds is a far cry from the double-digit rates seen in Portugal, Ireland and Greece. But if nothing is done to stop the dominoes falling, that yield will get higher, and the higher it goes, the more worried we should be.

To some, Europe may be a faraway country of which we need know nothing. But the economic reality is that any default-led devastation in euroland would sweep over Britain too.

This isn’t just a question of bank lending – though our banking system’s exposure is huge. It’s a question of bank ownership. Banco Santander is Spanish. Following its purchases of Abbey, B&B and A&L it’s also one of the largest players in the UK retail banking market with 26 million customers.

Imagine all of them lining up outside Santander’s 1,400 branches a la Northern Rock.

Then there’s the trade aspect. Export growth on the back of currency weakness has been a conspicuous bright spot for the UK these last couple of years.

Well over half those exports go to other EU countries.

There are systemic risks too. The euro is the world’s second reserve currency after the dollar. The eurozone is the world’s second largest economy. The collapse of these things would be a world event.

President Obama gave an impromptu acknowledgement of this on Wednesday while expressing his frustration over having to negotiate spending cuts to deal with his own country’s debt burden:

He walked out of a meeting with Republican congressional leaders on deficit reduction, telling them “enough was enough” … “They’re in one week and they’re out one week,” he said, making his irritation plain. “You need to be here. I’ve been here. I’ve been doing Afghanistan and bin Laden and the Greek crisis. You stay here. Let’s get it done.”

Afghanistan, bin Laden and the Greek crisis – the three most significant issues which came to the mind of the world’s most powerful man in an outburst of frustration.

If it’s that important to him, it’s at least that important to us. In fact, the tragic irony of the idea that Britain would save a bit of cash if the eurozone periphery were left to burn is that nothing would be more injurious to our economic interests.

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The Moody’s Blues Benefit Of The Doubt

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  • 1. PIGS Might Fly « The Blog @ Vigilant Financial  |  29/06/2012 at 4:03 pm

    […] not to be quite so enthusiastic about the idea closer to home too. In the economic sense at least, Britain is not an island. There are real concerns about the effect on our own prospects that deeper uncertainty on the […]

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