Greece: Default Contingency

Lord Eatwell Excerpts

Monday 20th June 2011 Lords Chamber

[Lord Eatwell]

My Lords, I am most grateful to the noble Lord for repeating as a Statement the answer to an Urgent Question given by the Financial Secretary in another place. I must begin by congratulating him on the feat of speaking for a full four and a half minutes without referring for a moment to the substance of the Question asked. However, he still has some way to go before acquiring the skills of Mr Alan Greenspan, who famously qualified his speeches when chairman of the Federal Reserve by declaring that, “If anyone understood me, I misspoke”.

Of course, everyone will agree that we live in dangerous financial times and it is incumbent on all those in authority to take care when commenting on market-sensitive information, even to the extent of not answering legitimate parliamentary questions. However, the other fundamental aspect of these uncertain times is that it is important to plan for the worst, even as we hope that it will not happen. Assurance that the Government are indeed planning for the worst will enhance rather than reduce market confidence. Without going into any analytical detail, will the noble Lord tell us what is the Treasury’s current worst-case estimate of the potential exposure of UK financial institutions should there be a disorderly Greek default? Even if he will not answer that question, in the event of market disorder will the present Government stand behind UK financial institutions as the previous Government did? Any worst-case estimate should not, of course, refer just to direct exposure to Greek sovereign and private debt, as the noble Lord did just now, but to the exposure to other jurisdictions that might reasonably be assumed to suffer contagion from a Greek default. Just as the collapse of Lehman Brothers inflicted such a shock on the western financial system that the wholesale funding markets froze, pushing major banks into insolvency from which they had to be rescued by the state, so in similar fashion a default in Greece could produce knock-on effects. Of course, all these effects may already be priced into the market—we hope that they are—but we must plan for the worst.

As the noble Lord will be aware, Mr Michael Cohrs, a member of the new Financial Policy Committee of the Bank of England, has stated that what keeps him awake at night is the interconnectedness of the system, which could create ripple effects in financial markets throughout Europe and beyond. Without referring to any particular market or giving any other detail, what is the Treasury’s worst-case estimate of the scale of those ripple effects as they might impact the UK?

We also learnt from the Lehman collapse that the consequential fall in bank lending to households and industry—Lehman had been growing at more than 20 per cent a year and then ceased to grow at all—resulted in a fall in GDP from which the UK still has not recovered and, again in consequence, led to a sharp rise in the Government deficit. What contingency measures have the Government put in place to ensure that lending to industry and households will not be cut in the face of any market turmoil produced by a Greek default? Industry in particular needs to be confident that lending will be available at reasonable cost. Will the Minister guarantee that at the very least the lending targets of Project Merlin will be attained? If the eurozone economic problems put upward pressure on the UK deficit, will the Government revise their deficit reduction policy?

Finally, given the potential damage to the UK economy of financial disorder in the eurozone, does the Minister accept that it is very disturbing that Her Majesty’s Government seem to take pride in the fact that they are playing no part in the development of UK policies that will minimise future damage to the UK? Is it not time for the Government to be more proactive in Europe in pursuit of Britain’s best interests?