George Osborne, the chancellor, is furiously opposing the idea, saying it is a “non-starter”, but the European commission confirmed it was under consideration in spite of British objections and German scepticism about the plan.
Osborne is arguing only eurozone countries should participate in the Greek bailout, so it would be wrong to tap the central EU fund set up in 2010 to help Ireland and Portugal, which is known as the European Financial Stabilisation Mechanism (EFSM).
Using this source of cash as an emergency bridging loan until a longer-term bailout plan is put in place would leave the UK out of pocket if Greece failed to repay it.
Osborne’s argument was boosted when the German finance minister, Wolfgang Schäuble, said it would “not be appropriate” to use the fund when some non-eurozone member states were against. The Czech Republic also registered objections.
However, the European commission likes the idea of using the EFSM, because funds can be unlocked relatively quickly with a qualified majority vote, meaning it cannot be blocked by Britain and the Czechs alone.
The proposal was not officially tabled at the meeting of EU finance ministers on Tuesday, but a working group looked at the issue among a number of proposals and eurozone finance ministers will discuss the options at a conference call on Wednesday.
After the Ecofin finance ministers’ meeting, Valdis Dombrovskis, the European commissioner in charge of the euro, confirmed that a loan to Greece from the EFSM was still being considered.
He said: “All options are quite complicated, either legally or politically or financially, but we need to find a solution as soon as possible.”
A Treasury source said: “During Ecofin and in the margins, the chancellor couldn’t have been clearer. We are immovable on this. British taxpayers’ cash must be protected. We will try to be constructive but this is a eurozone bailout.”
Eurozone officials have been scrambling to come up with €12bn (£8.5bn) in emergency funds for Greece until an €86bn three-year bailout is in place.
Work to reach agreement on the long-term bailout could take four weeks, but Greece is almost bankrupt.
The Greek government has to pay debts worth €7bn in July, plus a further €5bn by mid August. If Athens fails to repay €3.5bn to the European Central Bank on Monday 20 July, the Greek financial system could collapse.
On top of that, a leaked International Monetary Fund (IMF) report seen by Reuters warned that Greece would need debt relief far beyond what has been proposed so far.
The UK government argues that use of the EFSM would break a deal made between the commission and EU member states in 2010 that funds cannot be used to shore up the financial stability of the eurozone.
But the commission thinks the UK has misunderstood that agreement: it argues there is nothing to prevent use of EFSM funds to help one member state.
The Labour MEP, Richard Corbett, said British taxpayers were very unlikely to lose money. “The risks to British taxpayers’ liability is actually very small indeed, although I understand why he [Osborne] doesn’t want to create a precedent.”
Along with other EU member states, the UK would be providing a credit guarantee, rather than a direct loan. But the Treasury could be liable for £1bn if Greece failed to repay the EFSM fund.
Corbett said the issue was not helpful to the debate over Britain’s EU membership, although it was minor compared to the real issues facing the UK.
“This is a trivial sum in terms of what is at stake in terms of our membership of the European Union, especially as it is not a sum we are ever likely to pay.”
The prime minister’s official spokeswoman said on Tuesday that Cameron did not believe that UK cash should be on the line and there was currently no proposal on the table for this to happen.
Osborne said earlier that he would block any EU move to draw on an emergency fund containing British money for the new bailout programme.
Arriving in Brussels for a meeting of European finance ministers, Osborne said: “Britain is not in the euro, so the idea that British taxpayers will be on the line for this Greek deal is a complete non-starter. The eurozone needs to foot its own bill.”
Eurozone leaders struck a deal on Monday to prevent Greece from leaving the euro in return for a pledge from Athens to enact major reforms in the coming days.
The Greek prime minister, Alexis Tsipras, has vowed to secure parliamentary approval after accepting a third bailout programme that came at the end of exhaustive talks with EU leaders.
Britain, however, has been alarmed about the possibility of having to participate, leading the chancellor to hold a series of telephone conversations with his counterparts ahead of Tuesday’s meeting to emphasise his opposition.
This article was written by Jennifer Rankin in Brussels and Rowena Mason in London, for theguardian.com on Tuesday 14th July 2015 19.07 Europe/Londonguardian.co.uk © Guardian News and Media Limited 2010