Can the UK afford a bailout of Greece?
Bank of England Governor Mervyn King said today that the UK economic recovery is likely to be slow. The UK might be on the hook for a large bailout for Greece further impairing economic recovery.
The United Kingdom might be forced to bailout out debt ridden Greece, costing U.K. taxpayers as much as 3.5 billion pounds, or $5.47 billion. Adding on more debt would come at a very inopportune time and could prolong the U.K.’s recovery. British Prime Minister Gordon Brown will try to make sure the country doesn’t have to carry the burden of a bailout of Greece at a European summit today. However, EU officials have suggested that all European countries, including the U.K., might have to be a part of any bailout.
If the U.K. is forced to bailout Greece, it will add to the country’s current looming debt crisis. Mohamed A. El-Erian, manager of the world’s largest mutual fund Pacific Investment Management Co., said the U.K.’s growing debt is threatening its sovereign debt rating. He said,
“The sovereign most at risk right now is the U.K., in terms of its AAA rating.”
The Euro and pound continue to respond to updates on whether Europe will bail out Greece. On Thursday the Euro fell 1 percent against the pound, closing at .872 pence when German Chancellor Angela Merkel Greece's situation would be examined in March. Market participants were anticipating a quicker solution for the Greece debt crisis. .
A loss in the U.K.’s triple-A credit rating would induce investors to move out of U.K.pound-denominated assets. If the U.K. is stuck in political gridlock in the upcoming election with no clear victor, this prolongs the reforms to fix the deficit. A political grid could devalue the pound. Both the U.K. and Greece are facing a fiscal deficit of 12 percent of GDP.
Bank of England Governor Mervyn King said today that the U.K. economic recovery is likely to be slow due to the country’s large budget deficit and the continued unwillingness of banks to lend.
Douglas Carswell, a conservative MP, argues that since the U.K. is not even in the Eurozone, Greece’s troubles should not be of the country’s concern. He said,
“Britain wisely stayed out of the euro. There is now a strong possibility that Greece will default on her debts, something that is not our immediate problem.”
Daniel Hannan, another conservative MP, said the U.K. was able to avert a similar debt crisis because it stayed out of the Euro. He said,
“Monetary policy did exactly what monetary policy is supposed to do in these situations, acting as a shock absorber. Had we not accommodated a 25 per cent devaluation in our currency, we would have felt such a devaluation in output and jobs.”
If the Greek economy crashes, it could devalue the Euro causing harm to British exporters, since a stronger pound makes British goods in Europe more expensive. And if the Greek economy is bailed out, it could cause a moral hazard, as Euro countries won’t be incentivized to be fiscally prudent if the Eurozone will help bail out the ailing country.
Tags: Greece Debt, Mervyn King, UK, UK bailout
