The UK is drawing up plans to deal with the consequences of a possible collapse of the eurozone – including a fresh banking crisis – in the wake of the chaos in Greece.
The opening of the G20 summit of the world's most powerful economies in Cannes was overshadowed by the turmoil in Athens last night, as the Greek Prime Minister dramatically abandoned plans for a referendum on the European bailout deal in the face of furious opposition at home and abroad.
But, amid growing fears that a Greek economic meltdown could spread through the rest of Europe, there are still concerns that the European plan brokered last week is not enough.
G20 leaders, including David Cameron, are contemplating a huge expansion of the International Monetary Fund to cope with the consequences if Greece were to leave the eurozone.
The Treasury is considering a series of scenarios, concentrating on how Britain can best guard itself from the knock-on effects.
The Chancellor, George Osborne, is understood to be examining how the British banking system can insulate itself from any financial contagion spreading across the European Union and continue lending to businesses.
Ministers are also considering the potential impact of a crisis in the eurozone – Britain's biggest export market – on this country's stuttering recovery.
Greece's financial future remains entirely uncertain, after an extraordinary day of rumours and reversals in which the Prime Minister George Papandreou finally gave up on his plan for a referendum and appealed for national unity. That plea prompted a walkout by the opposition during a parliamentary debate on the confidence motion that will decide the government's future. And there is still no certainty that the country's rival political factions will be able to agree on a way forwards that avoids the country going bankrupt.
In London, Mark Hoban, the Financial Secretary to the Treasury, referred to the single currency "breaking up" – and told MPs that the Government had contingency plans in place to deal with the potential collapse of the euro.
He said: "This Government is well prepared for any eventuality."
Britain still hopes that the package of measures agreed by EU leaders last week, including a further €130bn bail-out of the Greek economy, will be enough to lift the immediate threat to the eurozone. But a senior Downing Street source confirmed that far gloomier outcomes were being examined by Treasury ministers and officials.
"We are looking at contingency plans. If we said there wasn't one, people would be alarmed." He added: "There is no blueprint in a drawer that can be pulled out. Such a document would soon be out of date. It is an organic process, involving constant monitoring of risks."
Howard Archer, the chief economist at IHS Global Insight, said: "The Treasury would be ensuring the banking system would be strong enough to deal with it and could continue to lend to business and customers. If the eurozone went belly-up, it would be like the period after the collapse of Lehman Brothers – only even worse."
Britain and France were pushing hard at the G20 summit in Cannes last night for the resources of the International Monetary Fund to be expanded in order to cope with the consequences of a potential economic meltdown that could be triggered by Greece crashing out of the eurozone.
"When the world is in crisis it is right to consider boosting the IMF," said David Cameron at the summit yesterday. The existence of a grand plan to bolster the international lender was confirmed by George Osborne who said: "A debate has begun, but not concluded, on increasing the resources of the IMF... We're now getting down to the nitty gritty of numbers."
He added: "I've not heard anyone object to the idea that we should increase the resources of the IMF."
Any suggestion of a British contribution to the eurozone bailout – even indirectly through the IMF – will cause domestic political problems for Mr Cameron, sparking uproar on the Tory back benches.
Mr Osborne said last night that to reveal a target number for IMF resources would be "premature".
But leaders will want to increase the lending power of the IMF considerably beyond its existing $950bn (600bn) in resources. That sum would not be enough to rescue a nation the size of Italy, which has a sovereign debt pile of €1.9trn (1.6trn).
Britain and France argue that the IMF's resources need to be increased considerably in order to send a clear message to financial markets that large nations, like Italy, will have a credible contingency fund if they run into trouble financing their debts.
UK government sources said yesterday that the French President, Nicolas Sarkozy, has accepted that the package agreed in Brussels last week to increase the firepower of the eurozone bailout fund, known as the European Financial Stability Facility, will not be sufficient to reassure investors in Italian and Spanish debt.
At the London G20 summit in 2009, Gordon Brown succeeded in persuading world leaders to triple the resources available to the IMF to $750bn, which helped to calm investors in the wake of the 2008 credit meltdown. British ministers are now arguing that similar measures are needed again in the face of a new emergency.
That argument was supported yesterday by the economist and expert on the Great Depression, Barry Eichengreen, who said: "IMF intervention is now the only alternative left for solving the crisis. Only the G20 can put the Fund in the driver's seat and give it the resources it needs to complete the task."
Until recently, the United States was resisting an extension of the IMF's resources. At the meeting of G20 finance ministers in Paris last month the US Treasury Secretary, Tim Geithner, rejected a proposal to boost the IMF's lending power, arguing that the Fund has "very substantial resources that are uncommitted".
One option would be to increase the general IMF contributions from every member. Another would be for willing countries to make bilateral loans to the IMF. According to G20 sources, China is much more interested in assisting the eurozone by lending to the IMF, rather than investing in the European bailout fund.
Timeline of yesterday's events
09:30 Two of PM George Papandreou's MPs say they will |abstain in a confidence vote, removing his majority.
10:00 An emergency Greek cabinet meeting starts.
14:51 MPs say Papandreou (left) has scrapped referendum.
14:56 Papandreou rejects election ideas.
17:20 French president Nicolas Sarkozy warns: "If euro explodes, Europe will explode."
17:44 Greek police report a number of "incidents" in Athens.
17:55 Antonis Samaras, head of Greek opposition, tells PM to resign.
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