Greek crisis: whose problem?

Hellenic hell would be bad for the UK mortgage market, argues Eric Stoclet, CEO of Crown Mortgage Management

For weeks the focus of the world’s media has fallen squarely on Greece, as fears mount that a default there has become inevitable.

As the EU’s finance ministers struggle to work out a rescue mechanism for Greece, British officials continue to insist the UK will not take part in any bailout. With its debt equivalent to 150% of its annual output, and with the lowest credit rating of any sovereign state, Greece is certainly a significant risk to UK lenders. But we can take comfort that UK banks’ exposure to Greek debt is ‘limited’ to a manageable £8.2 billion and therefore the direct impact to the British financial system of a Greek default remains relatively limited.

However, Greek risk to British banks is not as much related to the actual outstanding credit exposure to Greece as it is to the contagion effect of a Greek default to other periphery countries, among others Ireland. Relative to French, German and American banks, the British financial sector is far removed from Greece’s hardships. According to figures from the Bank for International Settlements, Ireland is a much more substantial £145 billion blip on British bank’s radar.

Unlike the situation in Greece, the financial crisis in Ireland is one in which Britain has been and remains intimately involved. Citing close ties between the two countries’ economies and banking systems, George Osborne and David Cameron have repeatedly said it is in Britain’s national interest to help Ireland. In fact, many of Britain’s lenders don’t have much choice in the matter. Having bought up bonds and other debt assets during the Irish boom years, many UK commercial banks are heavily exposed to Ireland. According to the Bank for International Settlements, UK bank lending to Irish households and companies amounted to £83 billion, and if these loans prove to be toxic, the impact on the UK banking system could be substantial.

While Ireland and Greece are lumped together as part of the now infamous PIIGS, some of the issues they face differ. Ireland has made good progress in reducing its current account deficit to -0.7% 0f GDP in 2010 versus Greece’s -10.5%, however Ireland has one of the highest gross external debt to GDP ratios in Europe at 1,040% versus Greece’s 165%. Notwithstanding the differences, if Greece “goes”” it is hard to imagine a scenario in which Ireland (and a number of other PIIGS) could avoid a similar fate. The resulting crisis could bring the global financial system back to the depths of the “”Lehman”” crisis.