Conal Gregory: Survival is the name of the game as Europe waits for roll of financial dice

The UK is not immune. While outside the euro, it is vital that there is a consistent hard currency in place for our major trading partners. Savers – notably with pension funds – should also be greatly concerned in view of the substantial investments held in fixed interest bonds in continental Europe.

In a little publicised move, the outgoing Labour Chancellor, Alistair Darling, took the rash decision to sign the UK up to fresh liabilities even though his party had been defeated at the polls and a new government was being formed. This was the European Stability Mechanism.

With no Parliamentary debate, Darling made the UK automatically liable for any EU bailout until 2013. His successor, George Osborne, has said Britain will withdraw unless the ESM reverts to its original purpose of providing help in the event of natural disasters.

The problem in Greece had been massive government over-expenditure. Despite its 110 billion euro (93.45bn) bailout in May, many feel the country is not doing enough to reduce its budget deficit.

In Ireland, the problem has been created by the banks who have speculated during a period of weak property prices. More UK exports go there than to all the BRIC countries (Brazil, Russia, India and China) combined and Ireland has attracted massive inward investment by offering one of the lowest corporate tax rates in the EU.

The UK cannot let the Irish economy collapse. Royal Bank of Scotland, Lloyds and Barclays have outstanding loans to Irish banks of 52bn, 27bn and 7bn respectively. Our help works out at around 300 per family but this is a loan and ought to be paid back.

The financial support has given a breathing space but "the spectre of contagion has not gone away and markets remain on the look-out for the next target," warns Phyllis Reed, head of economic, fixed income and currency research at private bank Kleinwort Benson.

The dice is rolling now towards Iberia and, initially, Portugal. One of the oldest nation states in Europe, Portugal was founded in 1139, which predates its neighbour, Spain, by almost 350 years. It is also our oldest ally.

Portugal is aiming to reduce its debt from 9.4 per cent GDP last year to 7.3 per cent this year and 4.6 per cent in 2011, which is significantly lower than the UK which is likely to be 10.1 per cent this year and 7.5 per cent in 2011.

Since joining the European Union in 1986, it has been lavish in its public expenditure projects. A visit earlier this month showed that its road building continues apace. The austerity programme recently announced caused a general strike, supported by the two largest trades unions for the first time since the 1974 revolution which overthrew Caetano.

Despite a firm government in Portugal, speculators feel the country may not be able to repay its loans and have raised yields on 10 year bonds to around seven per cent on repayments. In fact, Portugal does not need to seek new money this year, unlike Spain, which has still to issue new bonds.

This means that the two Iberian states are entering a vicious circle where the financing costs could escalate beyond their ability to repay. Several important companies here have major interests in Iberia, including Barclays, which has around 40bn exposure in Iberia.

The giant Spanish banking group Santander now owns Abbey, Alliance & Leicester and Bradford & Bingley's savings book but there is no risk to UK investors as Santander cannot transfer chunks of British cash abroad, even if it wished to. Santander also owns such important banks as Banesto and Central Hispano in Spain and Totta & Accores in Portugal.

Portugal is small in the context of the eurozone but Spain is much more significant and would be next in the firing line. The size of Spain's economy is larger than the three smaller periphery countries combined and represents about 11.5 per cent of the euro area's GDP.

Spain cannot be allowed to fail. "It would be too large for the European institutions to rescue and could bring the edifice of the euro project down with it," warns Ted Scott, director of UK Strategy at F&C Investments.

Like Portugal, bond yields in Spain have leapt up recently. If necessary, Portugal could be bailed out and would have to be because of its integrated trade with Spain and to shore up confidence there.

For those with property interests in Iberia, the coming weeks are likely to prove worrying with interest rates escalating and real estate values falling. Unemployment, already 20 per cent in Spain but only 10.8 per cent in Portugal, will place further pressure on each government.

For brave investors, this is a time to buy under-valued stocks that have global trading. There are several well-run companies in Iberia, such as Inditex (which own Zara) and Portuguese Telecom, which could be in any European portfolio. Today's crisis could be turned into a long-term benefit.

Conal Gregory is the Yorkshire Post's personal finance correspondent