The prime minister this morning chaired a meeting of senior officials to discuss the impact on the UK of possible Greek exit from the eurozone – and to take steps to ensure British banks and companies would not be excessively damaged.
Attended by the head of the Treasury, Nick Macpherson, the Treasury’s director of financial stability, Lowrie Kahn, and the Bank of England’s international director Phil Evans, David Cameron asked for information on the impact on Greece and the rest of the eurozone of Greece leaving the eurozone.
The chancellor did not attend, because he is on his way to the G20 meeting in Istanbul – though he has been kept in the loop on discussions.
There was agreement that the probability of Greece adopting a new currency had increased, as per my column of this morning. However those attending still believe that some kind of compromise between Athens and other eurozone governments can be reached to keep Greece in the euro.
David Cameron heard that Greek people would see their savings wiped out, inflation would take off, and there would be a massive devaluation,
He was also told that Greek companies and banks would face acute financial difficulties because of the mismatch between the “hard” euros they would owe to those outside Greece which would have to be serviced out of “soft” or “devaluing” new drachmas.
So any British businesses and banks owed money by Greek businesses or individuals would struggle to get their money back. However the direct exposure of British banks to Greece is relatively small.
Perhaps the bigger issue for the UK would be contagion from a Greek exit to other weaker eurozone economies – and the risk that they would suffer acute outflows of capital, which would further undermine their financial and economic stability.
A government source said that the eurozone remained hugely important to the UK as its most important trading partner, and so it is sensible for the prime minister to plan in case the Greek crisis were to worsen and exit could not be avoided.