Are you worried? Well you should be...

Whilst few in the UK lost any sleep over the yield on 10 year Greek bonds reaching 7.15% this news has rocked the Eurozone.

We can, however, not afford to underestimate the potential repercussions for our own sovereign debt. As Norman Lamont found out sometime ago, the market will quickly identify a lame duck and any slim chance of home grown economic recovery can be scuppered as foreign exchange dealers see easy pickings and will fight over the spoils.

The outlook for the UK has been made dramatically worse by its pitiful growth of just 0.1% in Q4 of 2010 despite the government's open cheque book and the USA achieving +5.7% in the same period (although a 2.4% reduction in the full year).

Inevitably, comparisons will be made between the UK and the Greek economy. Despite an EU 3% target, Greece is saddled with a vast budget deficit of 12.7% of GDP. As it is in the Eurozone it cannot devalue its currency nor set its own interest rates. In 2010, it must raise a staggering £47bn simply to cover its debts.The Greek premier has promised to cut the deficit this year by 4% but most believe this to be a pipe dream requiring savage cuts in public spending. It now remains to be seen if Germany bilaterally or the ECB/IMF will bail out Greece, by far the weakest of the 16 countries that have adopted the Euro, or let it leave the Eurozone altogether.

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Roger Davies BA ACIB, APMP
Principal Consultant
UK & European Regulation
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