Bank chief sets out his stall amid Greek cash crisis fears
The Government and the Bank of England have been drawing up contingency plans to help them shore up the financial system in the event of a Greek default, Bank Governor Sir Mervyn King said yesterday.
He told the Treasury Select Committee that talks have been held about how to deal with the fall-out from a Greek default although he refused to give details of the plans.
Financial markets calculate there is an 80% chance of Greece defaulting on its loans in some form, he added.
Last week the Bank said the eurozone debt crisis was the biggest issue affecting UK financial stability in the near future and called on banks to come clean about their direct and indirect exposure to the crisis.
Sir Mervyn said: "There's sufficient concern in the market about a default for us to think carefully about contingency plans and the consequences of such an event."
He added the Government's ability to lend more money to banks in the event of a banking crisis was far superior to that in place before the financial crisis and it could quickly raise money through regular bond sales.
The Bank said that UK banks have minimal exposure to the Greek crisis but may have loaned money to other banks, particularly in France and Germany, which may be more severely affected by a default.
Sir Mervyn also said that giving Greece another bailout could buy it more time but would not solve its problems, which demanded it tackle its budget deficit.
He repeated his calls for banks to be more open about their exposure to other financial institutions and debt-ridden nations.
There was a danger of a loss of confidence in the European banking system while uncertainty surrounded the market, he added.
The Bank has said inflation is likely to stay above target for two years as it is pushed upwards by higher commodities and import prices but will come back to target again.
It said the squeeze in consumer spending, which has led to a rash of retail chains going into administration in recent days, is due to continue for the foreseeable future as wages fail to keep up with inflation.
But Sir Mervyn said recent fears that the number of home repossessions would increase when interest rates rise were likely to have been "exaggerated" because there would be a delay before they were passed on and they would probably not rise by as much as the bank rate.