Yesterday markets around the world reacted to evidence of debt contagion, even after Greece’s €110bn rescue package. As a result, the Euro has fallen to a 14-month low against the Dollar to $1.27, a six-month low against the pound to £1.18 and an all-time low against the Swiss Franc to Fr1.41.
Moody’s says Italy, Portugal, Spain, Ireland and the UK are all at risk from investors turning their backs on sovereign investment. Moody’s says: “Each of the banking systems examined in this report faces different challenges, but the contagion risk could dilute these differences and impose very real, common threats on all of them.”
The report warns that the UK is in a “difficult position” due to the precarious nature of the economy. It says: “If it were to tighten fiscal conditions too quickly, then this could lead to further asset quality challenges in the banking system, potentially choking off economic recovery. Alternatively, if the UK did not tighten fiscal conditions soon and credibly enough, then the financial flexibility of the sovereign may diminish as market opinion may move against the UK.”
The debt crisis in Greece has forced the Greek government into making severe tax hikes and spending cuts. This has led to riots on the streets on Athens, where three bank workers were killed by a petrol bomb yesterday.
The ratings agency warns the UK’s large banking sector is a particular threat and says any ‘double dip’ recession that may afflict the UK after too harsh or too lax an austerity package will impact their domestic retail and real estate exposures. According to Moody’s, UK domestic banking assets equal more than 400 per cent of UK GDP, while Greek banking assets are equal to150 per cent of Greek GDP.
It says: “UK government has entered the crisis with higher debt levels, and the economy has been more harshly impacted due to the much greater reliance on the financial sector. Any reduction of this excess liquidity or increase in interest rates could destabilise this fragile balance, especially given that the high leverage of households provides little cushion against such a scenario.”
Travelex UK Trading Desk head Mark Bolsom says: “The seriousness of this situation cannot be overemphasised. The Euro is under heavy selling pressure as the situation in Greece reaches crisis point.
“There is also mounting concern that the crisis could spread to other member states and the added threats of contagion is exacerbating investors concerns. The markets just don’t have any confidence in the Eurozone’s financial system.”