Businesses and households could benefit from a planned £80bn emergency bank funding scheme unveiled by the chancellor and Bank of England governor.
Sir Mervyn King and George Osborne said they were cooperating on a “funding for lending” plan to see off a troubling new phase of the credit crunch.
British banks will be offered vital funding at low interest rates under the plans, in a bid to battle the higher funding costs facing them while they are under pressure to put more capital aside.
Funding for the scheme, which is expected to be up and running in a few weeks and will go on for four years, will be linked to bank lending performance.
Sir Mervyn told bankers in a speech at Mansion House in the City of London: “Today’s exceptional circumstances create a case for a temporary bank funding scheme to bridge to calmer times.”
He added that the Bank would now make available facilities which offer liquidity to banks of up to £5bn a month to help put cash into the system, a measure which was announced last December.
Osborne said: “We are not powerless in the face of the eurozone debt storm. Together we can deploy new firepower to defend our economy from the crisis on our doorstep.”
He continued: “The government – with the help of the Bank of England – will not stand on the sidelines and do nothing as the storm gathers.
“We are rolling up our sleeves and doing everything possible to protect British families and firms.”
Osborne also warned of the dangers posed by a Greek exit from the eurozone as interest rates on Spanish bonds hit new highs.
Dire consequences could occur unless an “ambitious” plan is put in place to deal with the fallout from a so-called “Grexit”, the chancellor told bankers.
Osborne suggested it may be the only way to see fundamental reform through in the eurozone, but if Greece was allowed to leave before measures were in place to contain contagion then it would be the “worst case for everybody”.
The chancellor made the speech as interest rates on Spanish bonds rose to new highs and sparked concerns about its ability to service debts.
German chancellor Angela Merkel has warned world leaders against “overestimating” her country’s ability to fix the crisis, while senior figures have poured cold water on suggestions of comprise over the issue of closer financial integration.
Osborne claimed that unless there was greater fiscal integration “the economic and political strains of deleveraging and balance sheet repair in the eurozone periphery may prove unbearable”.
The answer to the problem needed to involve a “shared backstop” for the banking system, more pooling of resources and stronger countries helping the weaker ones, he claimed.
Osborne said: “The political paradox Europe faces right now is this: some or all of these things are needed for the existing countries in the eurozone to make their currency work, but it may take Greek exit to make it happen.”