Spanish finance minister warns of difficult two months as UK plans capital controls for euro collapse

The eurozone sovereign debt crisis may be entering its final phase as Spain’s new finance minister Luis de Guindos warned that the next two months ‘are not going to be easy’ and the UK Treasury admitted it was working on contingency plans for the break up of the euro including capital controls to prevent excessive transfers of money into Britain.

Officials fear that the exit of Greece from the eurozone would trigger a flight of capital from other eurozone countries reckoned likely to exit: Portugal, Ireland, Spain and Italy. This inflow of capital would drive up the value of the UK pound with a potentially disastrous impact on British exports which have been rising recently.

Capital risk

The direct exposure of UK banks and corporates to the eurozone is also a major concern with $260 billion owed to the top four banks alone. One thing is for certain a disorderly break up of the eurozone will be extremely messy and the banks who borrowed $645 billion from the ECB before Christmas will be back for more capital.

Capital controls might make life difficult for the one million British expatriates who live in Spain but are often paid pensions from the UK. They have already suffered a sharp increase in their cost of living from the falling euro.

The British government is also having to consider contingency plans for evacuating these citizens and bringing them home in a worst case scenario as the UK is still responsible for their welfare. If this sounds alarmist then let us hope that is all it proves to be but the circumstances of the eurozone are very grave.

Debt still rising

It is not as though the authorities in Europe are unaware of the situation or its potential to spiral out-of-control. The hope now is that the ECB has bought enough time for the eurozone to gets its act together and create a new lender of last resort.

However, none of this addresses the real problem of the debts and budget deficits that continue to get bigger and bigger, and trying to do so by borrowing more is surely madness as many German economists argue.

Also you have to remember that even the hint of this coming crisis makes it more likely. What will stories like this today in The Daily Telegraph cause worried UK expatriates to do? Will they not start moving money before it is blocked?

Indeed it does not look an easy couple of months ahead.