Greece ‘No’ vote could cause financial instability

A NO vote in Sunday’s referendum in Greece would “test” the defences established in the UK and Europe against financial instability spreading, the deputy governor of the Bank of England has warned.

Leftwing protesters burn a European Union flag in Athens yesterday. Picture: Getty
Leftwing protesters burn a European Union flag in Athens yesterday. Picture: Getty

Sir Jon Cunliffe described Greece’s stand-off with its creditors as “very dangerous” and said it was necessary for the world’s central bankers to be “prepared for the worst”.

Banks have been closed all week in Greece to prevent a run driven by savers removing their cash, amid uncertainty about whether the country will crash out of the euro after falling into arrears with the International Monetary Fund.

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The IMF one of the country’s creditors in its two bailouts so far, said yesterday Greece needed debt relief and €50 billion (£35.5bn) in new financing from October through to 2018.

Voters will be asked on Sunday whether Greece should accept an austerity package put forward by international lenders in return for a further bailout from the eurozone rescue fund. Negotiations with the eurozone are expected to be put on hold until the result is in.

Prime minister Alexis Tsipras yesterday sent out conflicting signals, offering concessions on austerity measures but also insisting a No vote would give his Syriza government a stronger negotiating position.

Sir Jon, who has responsibility within the Bank of England for ensuring financial stability, said it was vital to monitor developments closely in what was a “volatile and fluid” situation.

He said the Bank could not exclude the possibility of Greek exit from the euro, telling BBC Radio 4’s Today programme: “Then it depends on how that shock transmits to other European peripheral economies and what happens in the financial markets.

“We are not seeing signs of real pressure on the peripheral economies – Portugal, Spain, Ireland – in the way that we saw two years ago, but if there is pressure there, then the European Central Bank now has instruments it didn’t have in 2011 and 2012.

“They have said they will use those instruments. We in the UK have made our systems more robust. The defences are there, but if this happens, those defences will be tested.”

Sir Jon went on: “It is a very volatile situation, it is a very fluid situation, and I think it is a very dangerous situation in Greece now. The banks are shut, the economy is pretty much frozen.

“This is fast-moving, volatile and fluid. We have to prepare for the worst. But I think we just have to monitor the situation very closely, day to day.”

Sir Jon stressed the UK’s direct exposure to the Greek economy was limited, representing only about 1 per cent of banks’ capital.

“The risks to the UK come not from Greece, they come from the fact that what happens in Greece could then transmit itself into pressure on other European peripheral economies,” he said.

He said he was hoping that negotiations between the Athens government and other eurozone countries would reopen following Sunday’s referendum, and said that even a No vote would not sound the death knell for the possibility of a deal to keep Greece in the euro.

“What the euro-area leaders have said is that they will look at whether they can restart negotiations reflecting the result of the referendum,” he said. “If it is a No, it is still possible that they could negotiate a deal.”

Sir Jon added: “If a country leaves the euro, the other members of the euro will want to demonstrate that the integrity of the euro is going to be protected by what they do.

“Greece shines a light on some longer-term issues for the euro which are not new.

“These are issues that the five presidents of the European Union have identified in a report about building a more robust monetary union, and it is very clear to the euro countries they need steps in the medium term for more integration in the euro area to make the currency more robust.”