Monday, December 26, 2011

UK Treasury working on plans for euro failure

The Telegraph reports that the UK Treasury is working on contingency plans in the event that the Eurozone breaks up.

My attention was drawn to what the UK would do in the event that depositors in the Eurozone elected to deposit their money in the UK.

Regular readers know that Eurozone depositors are already pulling their money out of banks in Greece, Ireland, Spain, Portugal and Italy.  The first place they transferred their deposits to was Switzerland, but Swiss authorities have been aggressive about stopping this inflow.  The second place they transferred their deposits to has been Germany; shown by the massive recirculation of euros through the German central bank.

While I only have anecdotal evidence, it appears that the way the Eurozone depositors are transferring their funds to the UK is through the purchase of high end real estate.  This is not surprising given that the rich would move their money first.

The Treasury is working on contingency plans for the disintegration of the single currency that include capital controls. 
The preparations are being made only for a worst-case scenario and would run alongside similar limited capital controls across Europe, imposed to reduce the economic fall-out of a break-up and to ease the transition to new currencies. 
Officials fear that if one member state left the euro, investors in both that country and other vulnerable eurozone nations would transfer their funds to safe havens abroad. 
Capital flight from weak euro nations to countries such as the UK would drive up sterling, dealing a devastating blow to the Government’s plans to rebalance the economy towards exports. 
Earlier this year, Switzerland was forced to peg its currency to the euro to protect the economy after a massive appreciation in the Swiss franc due to spiralling fears over Europe.... 
Britain’s response to the possible break up of the euro would reflect measures taken by Argentina when it dropped the dollar peg in 2002, according to sources. 
In addition to the risk of an appreciating currency, dealing with potential UK corporate exposures to the euro poses a considerable challenge for the Treasury. 
Britain’s top four banks have about £170bn of exposure to the troubled periphery of Greece, Ireland, Italy, Portugal and Spain through loans to companies, households, rival banks and holdings of sovereign debt. For Barclays and Royal Bank of Scotland, the loans equate to more than their entire equity capital buffer. 
Under European Union rules, capital controls can only be used in an emergency to impose “quantitative restrictions” on inflows, which would require agreement of the majority of EU members. Controls can only be put in place for six months, at which point an application would have to be made to renew them. 
Capital controls form just one part of a broader response to a euro break-up, however. Borders are expected to be closed and the Foreign Office is preparing to evacuate thousands of British expatriates and holidaymakers from stricken countries....

A break up of the euro would have a devastating impact on the UK. HSBC economists have warned that it could trigger a global depression and forecasters at the Centre for Economic & Business Research reckon it would knock about a percentage point off UK growth – plunging the country into a full-blown recession in 2012. 
The scale of economic problems alongside the existing debt burden would leave the Government with little in its armoury to combat the collapse, making capital controls one of the few viable options.

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