How should UK pension schemes react to the Greek debt crisis?

Rob Gardner: Chief executive, Redington

The contagion caused by the Greek debt crisis conjures memories of that Donald Rumsfeld quote from February 2002: “There are known knowns; these are things we know we know...the known unknowns...and the unknown unknowns”.

EU officials could have acted earlier on the “known knowns”, when it looked as if Greece would struggle to meet its €8.5bn debt, due on May 19. And “known unknowns” still linger even with the rescue deal.

Debt contagion could still spread to other European countries too, including the UK, and recovery in Europe “continues to be surrounded by high uncertainty”. If the bailout package doesn’t work, ultimately the European Central Bank will have to cut interest rates and buy government bonds, a tactic called quantitative easing.

Surprisingly, the ‘known unknown’ concern for UK pension funds is not whether they hold Greek or other European sovereign debt – very few did – but whether they have European banks in their equity and debt holdings.

Analysts predict French and German banks’ exposure to the PIIGS (Portugal, Ireland, Italy, Greece and Spain) is worth 20% of their total foreign risk. Further weakening of European sovereign debt will increase the risk they carry.

The contagion to the equity markets has happened. However, the big issue is that sovereign debt has lost its ‘risk-free’ status and is now trading like corporate credit, and contagion may spill out into the wider credit markets.

Richard Butcher: Managing director, Pitmans Independent Trustees

The contagion caused by the Greek debt crisis conjures memories of that Donald Rumsfeld quote from February 2002: “There are known knowns; these are things we know we know...the known unknowns...and the unknown unknowns”.

EU officials could have acted earlier on the “known knowns”, when it looked as if Greece would struggle to meet its €8.5bn debt, due on May 19. And “known unknowns” still linger even with the rescue deal.

Debt contagion could still spread to other European countries too, including the UK, and recovery in Europe “continues to be surrounded by high uncertainty”. If the bailout package doesn’t work, ultimately the European Central Bank will have to cut interest rates and buy government bonds, a tactic called quantitative easing.

Surprisingly, the ‘known unknown’ concern for UK pension funds is not whether they hold Greek or other European sovereign debt – very few did – but whether they have European banks in their equity and debt holdings.

Analysts predict French and German banks’ exposure to the PIIGS (Portugal, Ireland, Italy, Greece and Spain) is worth 20% of their total foreign risk. Further weakening of European sovereign debt will increase the risk they carry.

The contagion to the equity markets has happened. However, the big issue is that sovereign debt has lost its ‘risk-free’ status and is now trading like corporate credit, and contagion may spill out into the wider credit markets.

Paul Brain: Leader, fixed income Newton

Recent European events will be remembered as the wrong way to support a country in need.

The European government debt crisis (we should no longer call it the Greek crisis) will ultimately only be fixed when a buyer who doesn’t have to mark to market can be found.

In 2008, some banks courted sovereign wealth funds. This could occur again.

With the ongoing devaluation of the euro, the Chinese could diversify their reserves and buy short-dated sovereign European debt.

What then for the UK? If the new government does not make quick efforts to reduce the deficit, we face a crisis of confidence in our bond market.

Large fiscal imbalances will not be tolerated. There is too much competition in this area. The Greek situation has highlighted what can happen if governments do not act decisively: they will be punished by the bond vigilantes.

The rating agencies have given the UK a period of time, delayed by the election process, which will soon expire.

Assuming there is a fiscal deficit reduction plan, the Bank of England will do whatever is necessary to ensure there is not a double-dip recession. This may include further quantitative easing.

The large domestic demand for gilts means we are less beholden to foreign buyers. The sell-off would be less than the Greek example on the failure to tackle the deficit – but it is likely sterling would bear the brunt of the negative sentiment.