Eurozone (Contingency Plans)

Baroness Stuart of Edgbaston Excerpts

Monday 20th June 2011 Commons Chamber

[Ms Gisela Stuart (Birmingham, Edgbaston) (Lab)]

(Urgent Question): To ask the Minister what are Her Majesty’s Treasury’s contingency plans in case of a Greek default.

[The Financial Secretary to the Treasury (Mr Mark Hoban)]

Hon. Members will be aware of the recent developments in Greece. There has been considerable media speculation about what this means for the Greek adjustment programme and potential market reactions. I am not going to engage in speculation on what might or might not happen but give the House an account of the facts as they currently stand.

Let me begin with some background on Greece and the financial assistance package. The international financial assistance package for Greece was agreed in May 2010. The package is composed of two elements: a loan of €30 billion from the International Monetary Fund and €80 billion of bilateral loans from euro area member states to the Greek Government. Although they were created at a similar time, neither the European financial stabilisation mechanism, which is backed by the EU budget, nor the euro area-only European financial stability facility contributed to the package for Greece.

The adjustment package requires Greece to undertake significant actions. There are some very difficult questions that Greece has to address now, because the package assumed that it would be able to access market funding again in 2012, but this now looks unlikely in current market conditions. The House will also be aware of political developments in Greece; a new cabinet has been appointed and the Government will soon be subject to a vote of confidence in the Greek Parliament. Later this month, the Greek Parliament will also be voting on a medium-term fiscal strategy, which is a key element of the conditions attached to the current adjustment programme.

Against this backdrop, the euro area member states have been discussing the next steps. The Eurogroup, which comprises euro area member states, today released a statement calling on

“all political parties in Greece to support the programme’s main objectives and key policy measures to ensure a rigorous and expeditious implementation”.

The statement also said that Ministers will

“define by early July the main parameters of a clear new financing strategy”.

This is a statement from the euro area member states only. Let me be clear: the UK has not been involved in these discussions. We did not participate directly in the May 2010 package of support for Greece, and there has been no formal suggestion of UK bilateral loans or use of the EFSM, which is backed by the EU budget. The UK participated in the May 2010 package for Greece only through its membership of the IMF. So the burden of providing finance to Greece is shared between the IMF and euro area member states, and we fully expect this to continue. Our position on that is well understood across the euro area.

The UK believes that the international community needs a strong IMF as an anchor of global economic stability and prosperity. Over the past few years, we have seen how important that role can be in times of crisis, as the IMF has taken swift and decisive action to support the global economy.

There is, of course, no room for complacency. The Treasury, the Bank of England and the Financial Services Authority are monitoring the financial system, including in the euro area, on an ongoing basis. Many scenarios are considered as part of the normal policy development process. Hon. Members will agree that it would not be appropriate for me to discuss the detail of those scenarios. I also remind hon. Members that UK banks have little direct exposure to Greece.

The continuing uncertainty in the euro area is a reminder of the benefits of taking early action to stabilise and recapitalise the banks, as the UK has done. The UK banking system has developed a strong capital position, which has made it more resilient and will insure it against future risks. UK banks have made good progress in sourcing funding, despite the difficult market conditions.

The difficulties faced by eurozone countries such as Greece and Portugal reinforce why it is right to pursue the course that we set last year to tackle the deficit. The House should reflect that our deficit is larger than that of Portugal, but that our market rates are similar to those of Germany. The action we have taken to strengthen the country’s finances stands us in good stead during this period of instability in the eurozone. No one on either side of this House should lose sight of the importance of these decisions in protecting the UK economy.

[Ms Stuart]

It is absolutely true that there is no room for complacency, but there is also no room for selective blindness and deafness, which there clearly is on the Front Benches. We have yet another question on a bail-out to which Ministers say, “Of course, we cannot be specific and we will not indulge in speculation on events that may or may not happen.”

The United Kingdom will not be isolated if Greece defaults. Economists across the world are increasingly saying that it is a question not of if, but of when and are arguing that, for all intents and purposes, it has already happened. Another bail-out package will not solve Greece’s problems because it is not regaining competitiveness and cannot do so while it is in the eurozone. Therefore, is it not time that Her Majesty’s Government woke up and prepared for the possibility and almost inevitability of Greece defaulting? The situation will lead either to a Greek default or to the break-up of the eurozone. Whichever way it goes, we will not be isolated.

I will therefore ask the Minister some questions that go to the heart of the resilience that needs to be built up. The first is about institutional resilience. If he is really telling the House that people at the Treasury and the Bank of England have not started to get together to make practical provisions about who will meet, hold discussions and take action in the case of a default that would be comparable to Lehman Brothers, he is guilty of not stepping up to the responsibilities of his office.

Secondly, the Minister’s economic plans are completely predicated on the rest of Europe and the world being economically successful. If Greece defaults, other economies will not grow and ours will be affected. Therefore, should he not reconsider his VAT increase, because that would give us greater resilience?

[Mr Hoban]

indicated dissent.

[Ms Stuart]

The Minister shakes his head; I ask him to take me seriously.

Thirdly, I ask the Minister to consider article 66 of the treaty on the functioning of the European Union, which states:

“Where, in exceptional circumstances, movements of capital to or from third countries cause, or threaten to cause, serious difficulties for the operation of economic and monetary union, the Council”,

after consultation, can impose

“for a period not exceeding six months”

measures to restrict capital flows between the EU and the rest of the world. The UK would be affected by such restrictions of capital flows. Has he discussed that with the Commission? Has he made provision for how the UK economy would deal with that if it was imposed?

[Mr Hoban]

The hon. Lady poses a series of very good questions, to which I will respond.

The hon. Lady asked whether the authorities are working together. I said in response to her initial question that the Treasury, the Bank of England and the FSA are working closely on this matter and monitoring the situation. We are keen to ensure that the UK banking system is resilient. The additional capital that the banks hold now, compared with at the start of the crisis, will help with that. As I said, UK banks have not had difficulty in sourcing funding in the market. There is a concern about liquidity risk, but UK banks are continuing to source funding.

I mentioned in my statement the exposure of UK banks to the Greek Government. It is $4 billion, which is less than our exposure to, for example, the Irish banks. The hon. Lady should bear it in mind that French banks’ exposure is about four times that amount and that German banks’ exposure is about five times that amount. We are taking the matter seriously and considering it carefully, and the Chancellor is currently at the ECOFIN meeting in Luxembourg, where I am sure it will be discussed.

The hon. Lady talked about reversing the VAT increase. The shadow Chancellor proposed last week a cut in VAT that would cost £51 billion, which would put at risk our credibility in international markets. We have taken the difficult decisions to ensure that UK market rates are in line with those of Germany. The proposal that she put forward, and which her right hon. Friend put forward last week, would mean interest rates rising for families and businesses across this country, putting the recovery at risk. I do not think that is a gamble that we can afford to take.