Pound on the up as Greek turmoil drags down euro

Sterling rose 0.63 cents to 1.1368 — making a euro worth 87.98p — amid concerns over Greece's ballooning fiscal deficit.

Currency analysts warned that the chaos in Greece threatens to undermine the euro for much of 2010 while the pound is expected to strengthen as the British economy recovers.

"The Greek government has lost all fiscal credibility with the market," said Lee Hardman, currency economist at Bank of Tokyo-Mitsubishi. "We are also seeing some risk aversion on slowing growth momentum in developed countries such as Germany."

Finance ministers from the 16 euro nations met in Brussels today as Greece struggles to cut a budget deficit of 12.7 per cent of gross domestic product — the highest in the single currency region.

Rating agency Moody's said last week that the Greek and Portuguese economies may face "slow death" as they dedicate a higher proportion of their wealth to paying off debt.

There are fears that Europe could be forced to bail out Greece to stop it defaulting on its debts.

Jennifer Underwood, a strategist at Europe Arab Bank in London, said: "If the EU decides to bail out Greece, either via the European Central Bank or direct by other euro members, it would deliver a bad signal to other eurozone countries.

"Should no bailout be forthcoming and there is a Greek sovereign default, not only would the euro come under some heavy pressure on the foreign exchange markets, the weaker euro members would come under attack."

The pound is gaining support ahead of figures this month which are expected to show that Britain is finally out of recession. The prospect of the Bank of England calling time on its £200 billion printing money programme has also boosted sterling.