Treasury Approves Use Of EU-Wide Funds For Greece

George Osborne has signalled that he could allow the use of a controversial European Union fund to help provide Greece with a short-term loan – but only if the UK is protected from a possible default.

Treasury sources say that the UK would consider the use of the European Financial Stability Mechanism to provide a bridging loan of around €7bn (£5bn) to Greece to keep it afloat in the coming weeks – but only if an indemnity is provided to protect Britain’s cash.

The move may be seen by some as a compromise, since only yesterday the Chancellor, in Brussels for the meeting of EU finance ministers, was described as "furious" about the proposal to use the EFSM.

Mr Osborne told reporters as he went into the meeting: "The idea that British taxpayers are going to be on the line for this Greek deal is a complete non-starter. The eurozone needs to foot its own bill."

The fund became notorious in 2010 when, in the weekend after the general election, Alistair Darling allowed it to help finance bailout cash for Portugal and Ireland – despite Mr Osborne's reluctance.

The UK was subsequently assured it would not be used in future bail-outs.

However, the European Commission said today that if Greece is to get the short-term cash it desperately needs to pay its coming debts – including a €3.5bn (£2.5bn) ECB loan repayment due next Monday – the EFSM may be the only plausible fund it can mobilise in time.

It came as Greek MPs started to arrive at their parliament ahead of a vote on measures aimed at saving their economy.

On Monday, Sky News revealed that the fund was back under consideration in relation to the bail-out.

The EFSM gets its money by borrowing in the open markets, backed by the EU Budget.

If a country defaults on an EFSM loan, the losses would potentially come out of the EU Budget, which includes all 28 countries, rather than just the 19 Euro members.

According to Treasury sources, Britain could only consider the use of the EFSM if Britain and other non-euro members are fully-protected against the possibility of a default.

In the case of this Greek bridging loan, Britain's exposure could amount to around £600m.

That could mean using some cash from other sources – including the proceeds from the European Central Bank’s Securities Markets Programme (SMP), in which it bought up sovereign bonds to stabilise the market during the crisis. The technical details are still under discussion among officials in Brussels.

The source said: "We have very clear principle which is pretty widely accepted that British taxpayers should not be on the hook for a eurozone bailout."

However, the UK is concerned about being painted as the block to a deal which could resolve Greece's crisis.

The country's longer-term bailout is due to be provided largely by a euro-only fund, the European Stability Mechanism, which was set up after the 2010 controversy over the use of the EFSM.