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If Greece goes pear-shaped, Britain may go too

The righteous have their work done for them by others, the old Jewish proverb insists. Now that newspapers from the Daily Mail through to the Financial Times routinely run headlines describing ‘capitalism in crisis’, what purpose can possibly be served by rising at the crack of dawn to sell Socialist Worker to the early shift? It must take all the fun out of being a Trot.

Yesterday morning Greece admitted that it cannot meet deficit reduction targets, something that will surprise few observers. Instantly, the share prices of major European banks with exposure to Greek debt fell sharply. The Footsie was, at the time of writing, back below 5,000.

At least the markets are getting fair warning on this one. Nobody I know realised that Dubai was in trouble in 2009 until its difficulties could no longer be hidden. In the end, the emirate got by with a little help from its friends. But any day now, we could wake up and hear on the Today programme that a country many of us could barely find on a map has gone under.

Normally the likes of Cyprus and Slovenia – both reputedly under stress – wouldn’t matter too much. In the current climate, the possible repercussions of any one link in the chain breaking are as enormous as they are unpredictable. An unexpected development– a ‘Black Swan’, as the City slang put it – will mean that all bets are off.

Obviously it is wonderfully obliging of Standard & Poor’s to mark the opening of the Tory party conference with a statement reiterating its AAA/A-1+ sovereign credit rating for the UK. We hope Mr Osborne is suitably appreciative. But this entirely felicitous accident of timing aside, S&P’s underlying assumption is that Britain is an autonomous economic actor.

It isn’t, of course. Thanks in no small part to its imperialist heritage, British finance capital is integrated into the international financial market to an uncommon degree. It may not be particularly exposed to Greek debt, but it will certainly be exposed to those interests that are.

According to the Bank of International Settlements, UK banks of hold a relatively modest $3.4bn of Greek debt. Hey, let’s not quibble. A couple of rogue traders could soon squander that much given half a chance.

For comparison purposes, Japanese banks hold $432m of Greek debt; Spanish banks $530; US banks $1.5bn; Italian banks $2.35bn; UK banks $3.4bn; French banks $14.96bn; German banks $22.65bn; and Greek banks $62.8bn.

JP Morgan thinks the European Central Bank is on the hook for roughly $40bn. Individual banks in smaller countries such as Romania and Austria may have proportionately high exposure, while Albania, Macedonia and Bulgaria will lose out from a decline in remittances from guest workers in Greece, which constitute a significant proportion of GDP.

In other words, sovereign default within the eurozone has the potential to bring the banking system, British banks included, to a standstill. What follows thereafter we do not know, but no one would expect it to be pretty.

From a domestic political standpoint, there is a real sense in which what happens next is not something over which the British government has much say. The Coalition and Labour are both agreed on the need to reduce the UK’s deficit.

Broadly, Balls contends that Osborne is moving too far, too fast, and that reductions in public spending need to come at a gentler pace. It is a political problem for the Labour Party that the Coalition’s strategy still commands majority public support. I don’t like that either, but that is the reality.

The elephant in the room is that a global downturn could derail the UK economy, no matter who is in Number Eleven, just as sure as a straight flush beats out four of a kind. In short, if Greece goes pear-shaped, the odds on Britain following suit must be high.

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