Raoul Ruparel is Economic Analyst at Open Europe.
In addition to dealing with important EU issues at home, the UK government will face a huge challenge at this weekend’s EU summit – it will have the chance to act as the voice of reason amongst the cacophony of empty promises and grand gestures. Make no mistake, the eurozone crisis and the policies aimed at solving it can and do affect our economy. As our recent briefing highlights, under a Greek and Portuguese restructuring and accounting for the market prices of Irish, Spanish and Italian debt (a worst case scenario), the necessary recapitalisation of UK banks could total between £21bn - £45bn – that some of this would need to come from UK taxpayers should be enough to convince anyone of the gravity of the situation.
Certainly, there is no shortage of suggestions that the UK government could make to eurozone leaders. Let us start with their plan to use the EFSF, the eurozone’s bailout, to insure some part of peripheral sovereign debt.
The thrust of the plan is that €440bn worth of EFSF funds would be used to offer a guarantee of 20% on new, mainly, Italian and Spanish sovereign debt, therefore leveraging the coverage of the fund five times. This creates a circular situation where countries such as Italy and Spain are guaranteeing their own debt, making the extra insurance almost worthless in the case of a default (exactly when it is needed). The UK government could also point out the irony in the fact that, despite making insurance of sovereign debt the foundation of their latest eurozone ‘solution’, the same leaders have just imposed extra unnecessary financial regulation on the use of credit default swaps (a valid form of default insurance).
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