The industry faces fresh uncertainty as the world waits on Greece. Ian Taylor considers the implications

We appear close to a decisive moment in the extended crisis that has brought a four-year decline in the size of the UK travel market.

The industry has fared remarkably well in this period, given an overall decline in outbound holidays of about 20% since 2008, but fresh difficulties appear inescapable.

Greece is in the eye of the storm with re-run elections in mid-June, a likely default on the country’s debt and possible departure from the euro threatening a financial meltdown on a par with the Lehman Brothers failure four years ago. That led to a 7% decline in the UK economy from which we have not recovered.

The problems are not confined to Greece. The Spanish government was forced into a bank bail-out last week, with the finance minister declaring: “The battle for the euro is going to be waged in Spain.” This has immediate implications for British Airways’ parent International Airlines Group, whose single biggest shareholder is a Spanish bank. Traffic on Iberia will inevitably be affected.

Cyprus also had to shore up a bank, recession continued in Italy and there was talk of Ireland requiring another bail-out. Portugal is touted as “the next Greece”, but there are several candidates.

In the US, Wall Street bank JP Morgan reported a $2-billion loss on dodgy “structured products” – the junk bonds at back of the banking collapse in 2008. It confessed the London-based unit responsible has tied up $100 billion in these ‘securities’. We have been here before.

The combination of events led the Bank of England into its sharpest growth-forecast downgrade in three years, halving predicted GDP growth for this year to 0.6% or another year of stagnation while warning inflation would continue to outpace earnings.

Yet this storm did not come at us out of a clear sky. Bank of England governor Mervyn King warned on May 2: “The present crisis is far from over.” He went on: “Fifty years of rising living standards came to an end with the financial crisis.”

Credit to business and households was already tightening. In March, overdraft rates were their highest since 1995 and credit card rates the highest since 2001.

Against this background, it is remarkable that the travel sector goes into the next phase of uncertainty in such reasonable shape. The outbound leisure market has been difficult, but sales appear broadly in line with reduced capacity. Business travel in the first quarter outperformed the economy.

However, King was only stating the obvious last week when he said: “There is no meaningful way to quantify the most extreme possible outcomes. Even the threat of those outcomes is enough to affect the outlook for the UK, through its effect on bank funding costs, asset prices, the exchange rate, and the confidence of households and businesses . . .

“We have been through a big global financial crisis, the biggest downturn in world output since the 1930s, the biggest banking crisis in this country’s history, the biggest fiscal deficit in peace time and our biggest trading partner is tearing itself apart . . . The idea we could reasonably hope to sail serenely through this [is] wholly unrealistic.

“It is not sensible to think of this solely in terms of ‘euro stays together, excellent’; ‘euro comes apart, disaster’. Whatever happens, there are major problems ahead.”

This week we will see fresh evidence of the ‘pre-Greece’ state of the UK economy. Latest figures are expected to show a fall in inflation, yet with disappointing retail figures for April. A second assessment of first quarter GDP is not expected to produce a revision upwards.

What might be to come? We can expect the economy to be hit by a downturn in exports to the euro area. The markets will obviously be volatile. There could be a bank run.

Falling share prices would do fresh damage to Thomas Cook. Both Cook and Tui Travel take the bulk of their revenue in euros but report it in sterling, so a fall in the value of the euro would hurt unless takings in the UK compensate.

Life will be tougher for companies in debt – Thomas Cook again, which will be relieved to have completed a £1.4 billion bank refinancing ahead of the latest turn of events.  Insurance and bond markets will become more costly.

There will be a heightened sense of crisis and that could hit household and business confidence with implications for spending and jobs. The squeeze on lending is likely to become tighter and borrowing more expensive: we could have a fresh credit crunch. People near to retirement will see the value of pensions fall.

The upside could be a rise in the value of sterling. That would not help UK exports but give overseas holidaymakers more money. Those with second homes overseas would take a hit, however, and that might affect the budget airlines. Some travel and tourism businesses overseas could go under.

The industry will rise to whatever immediate challenge the situation throws up, should repatriation of holidaymakers be needed, for example.

People abroad in Greece at the moment the country defaults will face an immediate challenge. Banks would shut, cards not work. People would be advised to carry currency and change it as they go. Companies should already be clear how to respond.

However, contingency planning is difficult since not only is it uncertain how a euro-zone exit would play out, it is not likely to be announced in advance.

A decline in travel demand might be expected. Yet my guess is the same as yours: most people will still book holidays.