What risks are posed by Greece for UK?

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Media captionThe Prime Minister, David Cameron, insists that Britain will not be contributing to the latest package of help for Greece

Looked at in one way, Greece's financial problems don't look of tremendous concern to the UK.

British taxpayers have an indirect exposure to Greece, through an emergency loan made by the International Monetary Fund, of just £1.2bn. And British banks are at risk to the tune of £12bn from loans, guarantees and other forms of credit (on the basis of the last stats from the Bank for International Settlements).

It wouldn't be nice for Britain if Greece didn't pay us back. but the UK could cope with the first-round losses. Our banks have enough capital to absorb the shock. And £1.2bn is neither here nor there in the context of the UK's substantial deficit.

But if Greece were to default on its government debts of £300bn pounds, the impact on other economies and on the health of the financial system would be troubling.

In those circumstances, the knock-ons to the UK could be significant. To put it another way, if Greece's woes were to cause financial difficulties for other vulnerable countries, there could be serious pain for the UK.

For example, the British government - on behalf of British taxpayers - has directly and indirectly provided £11bn of emergency credit to Ireland and Portugal, two eurozone economies that like Greece have borrowed too much and been bailed out.

More substantial are the loans made by our big banks. They have financial exposure of £120bn to Ireland and £18bn to Portugal.

Also UK banks have £80bn at risk to Spain, whose economy, according to a statement made yesterday by the International Monetary Fund, hasn't yet been repaired and faces substantial risks.

Indeed probably the most powerful logic behind eurozone ministers' preference for lending more to Greece, to tied it over, rather than writing off a portion of Greek debts, is to prevent "contagion" to Spain - because right now there's a fear that the eurozone lacks the resources (and will) to collectively prop up a failing Spain.

The hope would therefore be that a Greek default could be avoided for long enough for the Spanish economy and public finances to recover sufficiently strongly for Spain to be able to weather whatever financial storms lie ahead.

As for the UK, the unpleasant truth is that if a Greek default precipitated big losses on loans to Ireland, Portugal and Spain, that would be a test for the UK's supersized banks, which aren't quite yet healed after the blows of 2007-8 - and, by implication, for British taxpayers too.

Also the UK could hardly insulate itself from a eurozone that was tipped back into recession by a renewed credit crunch, which might well be the consequence of Greece going bust (more than 40% of British exports are to eurozone countries).

So there are circumstances in which it would seem to be in the British national interest to participate in a further Greek rescue.

Right now David Cameron, the prime minister, says he doesn't want UK taxpayers to lend even another penny to Greece - on the basis, that the UK is outside the eurozone, and that it was Greece's membership of the eurozone which allowed it to borrow more during the boom years than turns out to have been prudent.

Mr Cameron will also be aware that Greece needs an additional emergency bridging loan of between £50bn and £100bn (it would be the lower figure of £50bn, if Greece were to succeed with a privatisation programme and in persuading private sector lenders to roll over debts as they fall due).

Which means that if Mr Cameron agrees with most bankers that a Greek default is only a matter of time, he may well fear that participating in a further bailout would be throwing good money after bad.

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