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TG: UK economy and the impact of the Greek issue
 
Although a eurozone meltdown seems to have been averted with a new Greek bailout, fears over the Greek economy continue to haunt UK business
European markets have rallied over the past fortnight as the Greek crisis has been yet again kicked into the long grass.
The Greek prime minister, Alexis Tsipras, secured a credit lifeline for his nation’s banks – which reopened on Monday 20 July for the first time in three weeks – and is negotiating a deal that would see his nation receive a third bailout.
But even if Greece remains in the single currency, the International Monetary Fund (IMF) predicts that its debt would peak at a crippling 200pc of GDP, leading to decades of strict austerity.
But what does it mean for the UK economy? If a Greek default were to cause contagion and if panic spreads, could it lead to a repeat of the financial crisis of 2008? In this scenario, wholesale interest rates would spike higher and this would mean higher rates on new mortgages.
However, if the Greek fallout is enough to rattle markets, but without causing extreme contagion, it could make yields on British Government bonds (gilts) – and mortgage costs – fall. This is due to the perception that Britain is a relatively safe place to park money in uncertain times.
But what about the impact of the Greek crisis on British businesses? If Greece and the rest of the eurozone should fall into crisis and recession again, will there be negative affects on the high street?
Absolutely, says Richard Buxton, head of equities at Old Mutual Global Investors. “Despite a deal being reached, the resulting strength of sterling against the euro has had a direct impact on companies that service the UK,” he says.
“Luxury goods providers, for instance, and London-based attractions owned by Merlin Entertainments, which I hold, will see business affected as the expensiveness of the pound puts European tourists off coming to the UK.”
Europe accounts for about half of Britain’s exports, and the weakness of the euro has already made it harder for UK manufacturers to compete, because the stronger pound has made the value of their goods and services more expensive abroad.
“Sterling has also been volatile after Mark Carney’s comments last week, suggesting an earlier interest rate rise in the cost of borrowing around the turn of the year,” Mr Buxton says.
“It was inevitable that the combination of the Greek situation, the effect of quantitative easing and comments from the Bank of England about raising rates at the beginning of the year would create some volatility.”
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