DAVID Cameron will today warn that “Greece is on the brink” and “the survival of the euro is in question,” thanks to “a crisis that never really went away.”
“The Eurozone is at a cross-roads,” he will say in a major speech on the economy. “It either has to make-up or it is looking at a potential break-up.”
The stark warning came as business leaders warned of severe consequences for the economy and Mervyn King revealed the Bank of England is planning how to respond to the break-up of the Eurozone, which looks increasingly likely as Greece may elect an anti-bailout government next month.
Britain’s economy has already been hit hard by the crisis, with exports affected and banks exposed to any collapse, but worse is yet to come with King warning of a “storm”.
Any solution will be expensive, Cameron told the Commons yesterday, as “[Europe] has got to build a proper firewall, it has got to take steps to secure the weakest members of the Eurozone, or it is going to have to… go in a different direction.”
King used unusually blunt terms, saying “the Eurozone is tearing itself apart, without any obvious solution.”
As a result, he said the Bank is working with the Financial Services Authority and Treasury to work out how to limit the fallout from a Eurozone exit, and that the Financial Policy Committee is considering the impact on the banking system.
Standard Chartered’s head of Europe Richard Holmes said he is planning for a Greek exit: “We have a task force trying to figure out what is the impact of this. For example… we clear euro dollars through Frankfurt so if there’s a redenomination of part of that flow then we are equipped to handle that.”
Although King refused to be drawn on the specifics, economists said a Greek exit could mean more loosening is on the way despite high inflation.
“The key transmission channel here is the contagion through financial markets and in particular the funding costs of the UK banks,” said RBS’s Richard Barwell. “The logical conclusion is that the MPC is signalling it is close to expanding QE.”
ECB boss Mario Draghi also acknowledged the prospect of an exit, but said his “strong preference is that Greece will continue to stay in the Eurozone.”
Meanwhile Michael Spencer, head of inter-dealer broker Icap and a former Tory treasurer, said his firm is ready to trade in drachmas within days if Greece pulls out of the euro.
“I don’t think it will happen next week but I think it will happen. The inclusion of Greece in the euro project was a profound error and will come back to haunt us,” he said.
Investors continued to move into safe haven assets, pushing British 10-year borrowing costs down to 1.88 per cent. Greek and Spanish stocks both fell 1.33 per cent, German shares fell 0.26 per cent, and the FTSE lost 0.6 per cent.