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 has confirmed, 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, 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."
Mr Bean made clear that Britain would not be immune from the impact of a break-up in the eurozone, even though it is not a member of the single currency. Problems in the eurozone would hit British exporters and would also affect banks carrying heavy exposure to German and French financial institutions, which are themselves exposed to the more vulnerable economies of southern Europe, he said.
Mr Bean added: "If there are serious storms coming from across the Channel which we have to cope with, there are a number of things we can do. UK banks don't have very heavy exposures to the troubled parts of the eurozone, but we would have exposures to French and German banks which have more significant exposures, so there could be linkages there.
"In those circumstances, we would provide temporary loans to banks that are in difficulty. We have various facilities, and introduced a new one just a couple of weeks ago as a precaution. It's not needed at the moment, but if we get into difficulty, we have got it there."
Suggested For You
SUBSCRIBE AND FOLLOW
Get top stories and blog posts emailed to me each day. Newsletters may offer personalized content or advertisements.Learn more