A failure to find a political solution to Greece’s sovereign debt problem could trigger a market correction, Bank of England official Alex Brazier said.
“A bad outcome in these negotiations could trigger a broader reassessment of risk in financial markets,” Brazier, executive director for financial stability at the BOE, told U.K. lawmakers in London on Tuesday.
“We start from a position where market pricing looks potentially subject to correction,” he said. “I don’t view Greece as a big direct risk but it could potentially be a trigger for a market reappraisal”
Greek Prime Minister Alexis Tsipras’s government is negotiating with euro-area member states, the European Central Bank and the International Monetary Fund to release more money from its bailout program. European governments have said they won’t disburse any more emergency loans unless the government in Athens implements a set of economic overhauls agreed last month, including pension and sales tax reform.
“I don’t presume to know how likely it is for Greece to leave the euro,” Brazier said. “Although the economic issue is in some ways very simple — there’s a debt overhang that needs to be dealt with — the way that is dealt with is a political issue and I don’t presume to be able to forecast in any way” how the talks will progress, he said.
Brazier said U.K. banks’ direct exposure to Greece was small, “amounting to about 2 billion pounds ($3 billion), which is about 1 percent of their common equity.”
Brazier was speaking to Parliament’s Treasury Committee as part of his appointment to the BOE’s Financial Policy Committee. In a submitted questionnaire, he said U.K. banking stability risks include events in Greece and geopolitical tensions related to Russia. Domestic threats include high household debt and a record current-account deficit.
On housing, he said risks still exist after the FPC took steps in 2014.
“We start in a position where the household sector is still very indebted,” he said. “I can quite imagine circumstances in which the housing market evolves in a way that the FPC would want to take further steps. But for now, those risks haven’t gotten any bigger.”
Brazier also said market liquidity has “probably become more fragile” and noted the potential for a market adjustment related to the start of Federal Reserve policy tightening.
In terms of ensuring the U.K. financial system has the necessary buffers against shocks, Brazier said last year’s stress tests were a good first step. One thing to consider would be to broaden the scope of the tests to include central counterparties, insurers and asset managers, both as part of the annual test and even in ad hoc reviews.