The Bank of England is worried that the Greek debt crisis could spill over into other European nations like Portugal, Spain, Italy, Romania, and Bulgaria, if things get any worse.
The central bank put out its latest Financial Stability Report today, which measures all the potential risks to Britain’s banking system and tries to grade how serious it thinks each one is.
The BoE is pretty confident UK banks are well insulated from Greece — out of all the stock owned by the banks, only 1% of it is in Greek companies. The big companies UK banks deal with also don’t have much exposure.
But the BoE is worried that the Greek crisis could spill over into other vulnerable European nations, causing a domino effect that would weakened Europe and, as a result, the UK.
Here’s what the BoE said in the report:
At the time of the Committee’s meeting, the deterioration in risk sentiment towards Greece had not spilled over materially to other euro-area economies, though spreads of sovereign bonds over bunds had risen over the month. Nevertheless, the situation remained fluid. Bulgarian, Italian, Portuguese, Romanian and Spanish sovereign bond spreads to bunds increased by around 30 to 45 basis points on 29 June.
The FPC will continue to monitor developments and remains alert to the possibility that a deepening of the Greek crisis could prompt a broader reassessment of risk in financial markets.
What “sovereign bond spreads to bunds” increasing means is that the interest rates on government debt from these nations is going up, relative to German debt. That means investors are demanding they be paid more to hold it.
That signals, in essence, that markets are getting skittish about lending to these countries. And if financing dries up it could be a disaster for all of Europe.