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UK banks' direct exposure to debt of struggling Eurozone economies could trigger "substantial contractionary shock"
By Finfacts Team
Aug 2, 2011 - 8:51 AM
UK banks' direct exposure to the sovereign debt
of struggling Eurozone economies is "manageable," but if big European
banks are impacted directly by the crisis, the UK could experience a
"substantial contractionary shock," the International Monetary Fund (IMF)
warned Monday.
In its annual health check of the UK economy, the
IMF reaffirmed its support for the British government's fiscal adjustment
program and the Bank of England's decision to keep its key interest rate at a
record low of 0.5%. The Fund said the economy should start to grow again with
GDP (gross domestic product) expanding 1.5% this year and 2.5% annually from
2012.
However, the Fund warned that developments in the
Eurozone are a "key risk" to that outlook. It estimates that UK banks are
owed a total of $178bn by Greek, Irish and Portuguese borrowers, of which Irish
borrowers account for $135bn. That's equivalent to 25% of UK banks' capital.
The IMF said the UK economy would be in peril if
the problems of the Eurozone's peripheral countries repaying their debts were to
lead to "stresses" among major European banks, or a disruption in the
international markets in which banks fund themselves.
"Such a combination of forces could set
off an adverse and self-reinforcing cycle of high bank losses and funding costs,
tighter credit, lower consumer confidence and exports, and falling real estate
prices, resulting in a substantial contractionary shock," the IMF said.
"The IMF is expecting a bumpy and uneven
recovery in the U.K. and our updated growth forecast for the near term, taking
into account the recent GDP release for the second quarter, will be published
with the September World Economic Outlook. Over the medium term, we expect
growth to accelerate gradually to about 2½%,"
Ajai Chopra, IMF mission chief, said on Monday.
"But volatile commodity prices, the uncertain magnitude of fiscal headwinds, and
problems in the Eurozone have added a lot of uncertainty to this outlook. It’s
not easy to steer a clear course in such circumstances."
