Could the UK face the same problems as Greece?

By Simon Atkinson
Business reporter, BBC News

Image caption,
Greece's economy remains in recession and is expected to contract by 3.5% in 2010.

The increasingly perilous state of Greece's economy has at least provided the British press with the chance to indulge in some laboured puns.

Wednesday's Times newspaper led the way, with a gloomy banner across its front page proclaiming that we have reached "Acropolis Now".

But, while the big news is Athens seeing its credit rating becoming the first in the eurozone to be slashed to junk status, the development is also prompting serious questions about whether the UK could be facing up to its own Greek tragedy.

The government has been playing down similarities, with Foreign Secretary David Miliband dismissing Conservative comparisons between the two as "economic illiteracy".

And Business Secretary Lord Mandelson was adamant that the two were "very different economies", adding "Britain is not Greece. Greece is not Britain".

Rising anger

But on the face of it there are some strong similarities - most noticeably in the government deficits.

While EU rules say these must be limited to 3% of a country's Gross Domestic Product (GDP), the UK's is expected to hit 12.6% this year. Greece's stands at 13.6% according to the EU.

And there is also some scepticism about the measures both the UK and Greece will take to bring down their deficits.

In the UK, the Institute of Financial Studies this week suggested that none of the main political parties at the looming General Election had been explicit about their spending plans and the scale of future cuts.

Meanwhile, there is scepticism that Athens can achieve the kind of cuts in public spending on which a bail-out from the EU and International Monetary Fund are contingent - especially given the rising anger of the country's people.

So why, when both economies clearly have severe financial difficulties - has the UK managed to hang on to its much-coveted Triple A credit rating?

"Clearly on the face of it we have a very similar deficit," says BBC economics editor, Stephanie Flanders. "However there are many things that are very different."

Market need

An obvious point is that Greece is still in recession with little sign of immediate improvements (its GDP is forecast to shrink by 3.5% in 2010).

The UK economy saw a return to growth in last three months of 2009 with initial figures showing this continued between January and March. The economy is forecast to continue to grow, albeit slowly.

Also, the UK's debt level, while high at more than 60% of GDP, is much lower than Greece's, which sits at about 115%.

And the type of debt is seen as significant too - with much of the UK debt not due for repayment for several years, unlike some other countries. It is predominantly made up of recently racked-up loans.

This means that it does not have to keep coming to the money markets to roll over the debt - in other words to refinance it.

"That's Greece's problem and other countries' too," our economics editor says. "They have to keep going to the markets. We're actually in a very strong position on that."

The UK's proven track record of increasing taxes and raising the money it says it is going to raise has also played in its favour, says Jeremy Batstone-Carr, research analyst at Charles Stanley.

"There are reasons to be concerned about Britain's need to tackle its deficit but we have not yet reached a critical point," he says.

"Credit rating agencies so far have given Britain the benefit of the doubt that we will enact the measures needed to bring down the deficit, however painful that will be."

'Line in sand'

Another advantage the UK has is that it controls its own currency - and so has a floating exchange rate.

"It could, if it wanted to, devalue its currency, and that would relieve some of the pressure," says Mr Batstone-Carr. While such an action can have negative consequences as well as benefits - it is at least an option.

Greece, which entered the eurozone in 2001, does not have the luxury to act independently.

And while there has been speculation that it might withdraw, or even be kicked out, of the euro, most think this is unlikely - not least because as its debt is euro-denominated, its exit from the currency would make refinancing even more expensive.

This lack of currency flexibility is partly why other economically struggling European nations are being seen as at greater risk than the UK - most notably Portugal, (which had its credit rating cut on Tuesday by Standard & Poor's), the Irish Republic and Spain which all use the euro.

And it is Spain whose fortunes should be watched most closely for signs of a major impact on the UK, Mr Batstone-Carr says.

"Spain is the key line in the sand, its economy is much bigger than Greece's and so it would take a far greater amount to bail it out," he says.

"If Spain can survive, then the markets will take the view that the whole sovereign debt crisis is containable.

"But if Spain were to fail it would turn into a major macro-economic event and that would threatened all indebted economies, including the UK and the US."

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