Britain may initially benefit from capital flows in the event of a euro-area breakup as investors seek safety from turmoil in the currency region, said former U.K. Treasury adviser Roger Bootle.
“We would find the U.K. being regarded as a safe haven with continued capital inflows for a while,” Bootle, founder of Capital Economics Ltd., said in an interview at an event in London today. “But we’re certainly not a safe haven in terms of the real economy -- we would be one of the hardest hit of all.”
The euro debt crisis has led five nations to seek international financial aid and fueled speculation that one or more members may leave. Reuters reported late yesterday that Spain was preparing to ask the European Union for a sovereign bailout, citing four unidentified European officials.
Yields on Spanish 10-year debt remain historically high, even after the European Central Bank’s pledge to buy unlimited amounts of government bonds to quell the crisis. The yield on the securities is currently 5.73 percent, compared with an average of 4.74 percent in the past five years.
Bootle said that in the event of a euro breakup, the U.K. government would be more prepared to fully nationalize any British bank that ran into difficulty compared with the aftermath of the Lehman Brothers Holdings Inc. bankruptcy in 2008. The Bank of England would also “flood the system with liquidity” and expand the range of assets purchased as part of its stimulus measures, he said.
“Our working assumption has been that a weak country, probably Greece, will be first to leave,” Bootle said in a speech at the event organized by Capital Economics on the consequences of a euro-area breakup. “Indeed, Greece might leave in a matter of months. Then not long after that, another vulnerable country on the periphery would follow at some point, probably next year.”