How does Greece’s bailout affect Britain?

There are two ways in which the Greek crisis affects Britain. Directly, the contribution to the bailout of Greece is relatively small.

The last bailout came from two sources. The Eurozone, which does not include Britain, contributed 80bn euros. Another 30bn euros came from the International Monetary Fund (IMF), a body of which the UK is a member.

It holds around 4.5 per cent of the shares in the IMF, and thus the taxpayer stands behind a 4.5 per cent of the IMF chunk of bailout – a sum which comes to slightly more than £1bn.

Greece is now negotiating a second bailout, thought to be around the same size as the first. And the Chief Secretary to the Treasury today indicated that Britain’s input to the Greek Bailout 2.0 would again be limited to our contributions via the IMF. “There’s simply no proposition on the table for the UK to contribute beyond that IMF involvement and I don’t expect there to be one,” Danny Alexander MP told Sky News.

Read more: Bailout or default for debt-laden Greece?

But these sums are dwarfed by the potential damage the bailout could do to our banks and the stability of the international financial system. British banks have a 13bn euro exposure to public and private borrowers in Greece. French banks have a much bigger exposure – 53bn euros and German banks are exposed to the tune of 34bn euros.

Should Greece admit that it can no longer pay its debts, International banks would have to recognise massive losses on the loans they have made to Greek banks. Many of those loans will be insured by other banks – through an instrument called a Credit Default Swap – and the insurers would face massive losses themselves. Britain’s financial institutions would definitely be exposed to these losses too.

There is also great uncertainty about who will actually end up with the losses, once all the insurance policies have settled. And this uncertainty could lead to a collapse of confidence which would be even more damaging than the losses themselves.

European and British banks are only just recovering from the damage caused by the financial crisis of 2008. Another round of heavy losses would hit them further, and more state bailouts could be necessary.

There is a serious risk that a crisis in Greece could precipitate a further loss in other Eurozone countries which are also struggling to repay government debts – Ireland, Portugal and Spain.

The obvious comparison is the collapse of Lehman Brothers in 2008, which caused massive losses, compounded by a climate of uncertainty and fear about who had lost what.

This is not mere journalistic hyperbole. In April a board member of the European Central Bank, Juergen Stark, made the comparison himself: “In the worst case, the restructuring of a member state could overshadow the effects of the Lehman bankruptcy,” he wrote.

Greece owes 340bn euros – one and a half times the size of its economy – and most commentators agree that the loans are so great that they can never be repaid. But European governments hope that the moment of reckoning can be delayed, to a time when the continent’s banks are stronger and better able to withstand the shock which increasingly looks inevitable.

But that depends on the Greek government being able to withstand the howls of protest from the streets, and increasing dissent within Greece’s Parliament. If the government falls, Europe’s financial system will face its day of reckoning sooner than its politicians would wish.