How would a Grexit affect Britain?

David Cameron and Alexis Tsipras  © Getty Images
Britain’s direct exposure to Greece is relatively small

Greece is due to vote on whether to accept the latest bailout offer on Sunday. But how would a Grexit affect Britain – both our economy and our membership of the EU?

What’s happening?

On Saturday, Greece called a referendum for next Sunday on whether it should accept the terms offered by its creditors. As a result, the Greek government has been forced to announce several emergency measures to shield its banking system.

These include: declaring a “bank holiday” lasting for at least the rest of this week; shutting the stock market; imposing capital controls; and limiting cash machine withdrawals using domestic bank cards to only €60 a day.

While the Troika (the ‘bailout’ team composed of the International Monetary Fund (IMF), the European Commission, and the European Central Bank) has reiterated vague promises of eventual debt relief, it has not made any additional concessions yet.

So, which way will Greece vote?

The polls are uncertain. One suggests that 57% will vote to accept the deal, while another puts the figure at just 47%.

The situation is complicated by the fact that the vote is likely to be on the deal itself, not euro membership. Indeed, the Greek finance minister claims that any forced ejection from the euro due to a ‘no’ vote “would not be consistent with basic principles of European democratic governance and European Law”.

While the reality is that the two are linked, some people who may want to remain in the euro may still vote to reject the deal, hoping that the Troika is bluffing.

Another ambiguity is that, as Capital Economics points out, “it is far from clear which iteration of the creditors’ proposals will be on the table”.

How would Grexit directly affect Britain?

Thanks to the “five tests” for euro membership set by Gordon Brown and Ed Balls in October 1997, Britain chose to remain outside the euro.

Britain’s direct exposure to Greece is relatively small. British banks’ and pensions funds’ exposure to Greece was £12.4bn in March 2008, and around £8bn at the start of this year, but this has now plunged to around £2bn.

Britain is, of course, a shareholder in the IMF, which owns around €32bn of Greek debt but, it has a stake of only 4.5% (the US has a 17.6% stake). This is equivalent to an exposure of just under €1.5bn – significant, but small compared to Germany which holds €56bn of Greek debt (France is the second-largest individual creditor with €42bn).

Is there a risk of contagion?

What’s worrying central bankers around the world is the risk of a “Lehman moment”, the collapse of a relatively small institution leading to financial panic.

Under this scenario the exit of Greece from the eurozone would lead investors to question whether Spain or Greece would be next. Eventually this could lead to a blind panic, with investors dumping all forms of sovereign debt.

However, even in the event of this outcome, it is more likely that British gilts could benefit from the perception of the UK as a safe haven.

It’s also worth noting that – just as the banking crisis would have occurred even if Lehman had been bailed out – some sort of correction in the bond market seems inevitable, as yields are at historic lows.

What about ‘Brexit’?

At the moment, David Cameron seems to be making little headway in his attempts to renegotiate the terms of UK’s EU membership. This is down to the widespread perception (supported by the polls) that the British people will vote to stay in the EU whatever is agreed.

However, if Greece does vote to leave it might demonstrate that Britain cannot be taken for granted, forcing Europe to make additional concessions – particularly if there’s a wider sense that eurozone countries are lining up to leave.

An alternative view (and one implicitly backed by Cameron until now) is that the shock of a Grexit would lead to further European integration, drawing Britain even closer to Brussels. Either way, the negotiations over Britain will be pushed to one side while the crisis is resolved, so the referendum may end up being delayed.