UK banks are currently owed hundreds of billions of euros by the countries currently at the centre of the European debt crisis. France owes British banks €227 billion, while Ireland, Spain, Italy and Portugal owe €104.5 billion, €74.9 billion, €54.7 billion and £18.9 billion respectively, according to data from the Bank for International Settlements. Greece, the leading protagonist in the debacle so far, has borrowed a relatively modest €9.4 billion from UK lenders.
Although the countries involved may seem far removed from the UK and the numbers trotted out almost meaningless by dint of their length, we as a nation could be severely affected by what pans out in the eurozone over the coming weeks and months, despite the fact we’re not even in the single currency. If our banks don’t get their money back, the financial meltdown of 2008 could well be eclipsed.
But what does all this all mean for you? It’s all very well arguing the toss over whether countries like Greece or Portugal should ever have been allowed to join the euro in the first place, or how quickly the crisis will plunge the region – and Britain – back into recession. It’s almost guaranteed that the crisis with hit growth in the UK over the coming years and have a severe effect on our trade with our European partners. But you already know all this, and it doesn’t directly affect you. You want to know how the crisis is going to hit you in the pocket. The truth is, it probably already has.
UK banks are heavily exposed to European debt. If a country like Greece defaults, or negotiates a write-down on what it owes as happened at the end of October, Britain’s financial institutions take a big hit. Our banks are also exposed to risky positions held by other European banks through insurance and debt default guarantees. If the money owed to our banks isn’t repaid by countries like Greece, Italy, Portugal and Ireland, they will have less money to fund their operations and their losses will need to be recouped.
If one or more of the countries currently struggling with their deficits were to effectively go bankrupt and default on money owed to UK banks, lending to individuals and small businesses would slow down, much in the same way as it did after the beginning of the “credit crunch” in 2008. This would result in banks becoming more reluctant to lend to individuals and small businesses. Those that qualify for a loan will be charged a higher rate of interest. This would have a knock-on effect on the whole economy by pushing individuals further into debt and stifling growth. Data from Moneyfacts suggests the crisis is already exerting upward pressure on mortgage rates. The average two-year tracker hit 3.58% last month, up from 3.39% in September, its highest level since June 2010.
Banks that lose money in the eurozone crisis will be looking for ways to recoup their losses quickly. One the easiest ways for them to do this is to reduce the amount they pay you in interest on your savings. With some savings products already paying out as little as 0.05%, anybody expecting an improvement on their returns anytime soon shouldn’t hold their breath.
The debt crisis is particularly bad news if you’re planning to retire in the next few months. Market volatility has wiped 10% from the value of some pension schemes in the last few weeks alone. Spooked investors have been pulling out of equity markets and heading for the safety of the bonds. This has served to push government bond yields to their lowest level in history which has in turn widened the deficit between the assets and liabilities of Britain’s private pension schemes by nearly £50 billion (pension providers are big investors in the bond market). An employee entering retirement earlier in the year could have expected an annual income of £6,500 for every £100,000 saved. This has fallen by £500 to just £5,950 within the last month.
Stock market volatility
The FTSE 100 Index has dropped over 900 points since the beginning of July – mostly thanks to the chaos in Europe – wiping millions off the value of the country’s richest firms and hitting private investors hard. The fall in the stock market is bad news for you if you have money in index-linked savings products or a private pension scheme that invests heavily in the markets. You could also be hit if companies you do business with make a loss. Insurance companies invest heavily in the stock market and could pass any losses they incur onto you in the shape of higher premiums.
The pound fell 1% against the euro yesterday and the pound-to-euro rate is lower now than at this time last year. One would assume that a debt crisis of this magnitude would have seen the pound trouncing the euro. Unfortunately not. Investors see the pound as being inextricably linked to the euro crisis due to the UK’s exposure to EU countries’ debt. This, along with the continuing weakness of the UK economy, is keeping currency traders well away from sterling. This means it will be more expensive for you to go on holiday and buy goods from abroad (the pound also hit a one month low against the dollar yesterday). There is one potential silver lining to the crisis currency-wise; if Greece were to default, withdraw from the euro, and readopt the drachma, you can look forward to oodles of cheap moussaka and ouzo on your next Greek holiday.