What the Greek debt crisis means for the UK

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Media captionLord Digby Jones says even though Britain's not in the euro, people in the UK should be worried

The Greek debt crisis continues to form beads of sweat on the foreheads of bankers everywhere - including those in the UK.

That is because the situation has consequences well beyond Greece and the other 16 countries that use the euro.

Despite the relatively low exposure of UK banks to Greek debt, most British banks are worried about what the unfolding crisis might mean for them and the wider economy.

This week, billions of pounds were wiped off the value of three of the UK's leading banks - although their shares have since began recovering.

So what are the risks for the UK?

Fears of contagion

Everyone is worried that Greece - which has more than 300bn euros (£264bn) of debt - will have to default and say that it cannot pay back its creditors.

Many fear that even if they don't default, Greece's benefactors in the European Union will impose some kind of loss on private investors to make the country's debts more manageable.

That shouldn't be life-threatening to UK banks.

The UK has around $14.7bn (£9.1bn) in total exposure to Greek debt. And according to the Bank of England, only around $2.3bn of those claims are held directly by banks.

The aftermath is somewhat more worrying.

"The main problem if we do see some sort of credit event in Greece is that it could trigger bigger problems throughout the eurozone," says Peter Dixon, an economist in London at Commerzbank.

Since Greece was first bailed out last year, the Irish Republic and Portugal have also been bailed out by the EU and IMF.

And this week, Spanish and Italian bond yields surged past 6% - unsustainable levels for those heavily-indebted countries to borrow in the long run.

If Greece defaults, then the risk is contagion - other countries might default too.

Of the so-called "peripherals," or struggling economies in the eurozone, UK banks are most exposed to those in the Republic of Ireland.

The UK has around $136.6bn in total exposure to Irish debt - more than eight times its Greek exposure. And the UK has $100bn of Spanish exposure.

A Greek default would put pressure on these countries to call it it a day as well, which would put further huge pressures on the UK's balance sheet.

European banks

Image caption The noose of the Greek debt crisis is tightening around the necks of its neighbours

But the biggest direct victims of a default would be German and French banks, which hold the most expsoure to Greek debt.

This would be a disaster for the two biggest economies in Europe and lead to stunted growth, job losses and other economic shocks across the continent.

With the eurozone accounting for 40% of UK exports, this is a British problem as well.

"If the whole of Europe is pushed down, well, our market is gone," the former trade minister Lord Digby Jones told the BBC.

"So everyone in Britain should worry about this."

Lehman redux?

A Greek default has been casually referred to as Europe's "Lehman moment" - a reference to the collapse of the US investment bank that triggered the 2008 financial crisis.

In the aftermath of Lehman's demise, banks were worried about how much bad debt the others had and inter-bank borrowing came to a halt.

There is the chance that the same thing could happen again in London - the financial capital of Europe.

Banks and businesses in the UK are still recovering from the effects of that loss of confidence.

But Mr Dixon feels, unlike when Lehman fell, everyone is quite aware of which countries hold how much debt from whom and greater transparency should limit the panic.

"I don't imagine anything of the same scale as the latter stages of 2008," he says.

Still, no-one is quite sure exactly what a sovereign default within the euro might mean because it has never happened before.

And that uncertainty leads to more fear from those on the outside looking in.