Bank of England 'taking eurozone precautions'

The Bank of England is making preparations to support UK banks in the event of a break-up of the eurozone, deputy governor Charlie Bean confirmed today, describing the present state of the single currency area as a “worrying situation”.

Mr Bean said that the Bank has recently introduced a temporary loan facility as a precaution, for use in the event of contagion from the eurozone crisis endangering British institutions.

The deputy governor predicted “pretty flat” economic conditions in the UK over the next six months, and did not rule out a “double-dip” recession. But he forecast that a sharp decline in inflation would see spending and growth begin to rise again by the time of the Olympics in the summer.

He did not rule out a further round of quantitative easing at the time of the Bank’s Monetary Policy Committee meeting in February.

In an interview on BBC Radio 4’s World at One, Mr Bean was asked if he feared a collapse in the single currency, with one or more of the 17 member states leaving the euro.

He replied: “I don’t want to put probabilities on it breaking up, but it is clearly a worrying situation.

“Countries eventually may feel that they are better off outside the eurozone than in it.

“One thing that is important to stress is that it is not easy for a country to leave. It is quite a disruptive thing.

“If, say, Greece were to decide to leave and reintroduce the drachma, what you would probably find is that immediately people would take money out of Greek banks, the Greek bank system would be in great difficulties, businesses would find some of their assets and liabilities would be redenominated in drachmas while some would stay in euros, they could well find themselves going bankrupt.

“It’s a very, very costly direction to go.”