Greece’s economy is in a mess, with soaring public debt and profound difficulty in financing its excessive expenditure. Its 10-year bonds have recently been yielding over 6.5% - double those of fellow Euro member, Germany. The concern for the EU authorities is whether the serious economic plight of Greece – the Euro’s weakest link - will infect other Euro members and, indeed, threaten the Euro project itself.
Other Euro members, especially those in the Mediterranean region, are seeking to distance themselves from Greece. The quaintly-named Socrates – not the moody Brazilian football star of the 1980s but Portugal’s current Prime Minister - has sought to differentiate his country from Greece. Not surprisingly, Spain is also getting very edgy. Given that its economy is more than four times the size of Greece’s, any serious weakening in its bond yields would be a profound worry.
There is an element of déjà vue here. After all, the shares of virtually every quoted UK bank, except HSBC and Barclays, were persistently undermined by sellers over a period of months; subsequently, these banks were bailed out by the Government. And in Barclays’ case, as Wellington said at Waterloo, ‘it was a damned near-run thing’.
For the UK, of course, memories abound of its humiliating – and forced - withdrawal from the ERM in 1992. Having prudently remained outside the Euro, the UK’s role is now more passive. Instead the focus will be on Germany’s Bundeskanzlerin, Angela Merkel, and France’s Finance Minister, Christine Lagarde. They may need to sanction substantial financial support if the Greece crisis worsens – or if Euro contagion occurs. Furthermore, the IMF may intervene.
Worrying times certainly. But is there not a loud message here for the UK whose Public Sector Net Borrowing is due to be £178 billion this year – with a similar figure for 2010/11?
