Bank of England Governor Sir Mervyn King has told banks to get ready for a eurozone collapse, according to The Courier newspaper in the United Kingdom.
Five troubled eurozone countries — Greece, Portugal, Italy, Spain and Ireland — owe U.K. banks nearly 200 billion pounds ($311.87 billion). The banks may have more difficulty lending, which would slow down the U.K. economy.
Plus, trade will be restricted if eurozone members returned to their own currencies. As a major exporter to the eurozone, the United Kingdom would be in trouble.
|Bank of England Governor Sir Mervyn King
(Associated Press photo)
Economists warn that Britain, which is a European Union member but doesn't use the euro, will fall into a recession if the eurozone does disintegrate. The United Kingdom is already on the brink of another credit crunch.
At a news conference, King said the Bank of England is planning for many scenarios but declined to provide specifics, according to The Associated Press.
"There are many ways in which the future could play out," he said, he Associated Press reported.
"Maybe it won't break up, maybe it will continue in various forms, but maybe there will still be questions of default."
According to The Telegraph, the Bank of England has told U.K. banks to slash bonuses and dividends and raise capital in an attempt to protect themselves.
Taxpayers will probably end up pumping more money into banks, since bank stocks have plummeted and most banks have already cut dividends, predicts Philip Aldrick, economics editor for The Telegraph.
"An immediate risk to U.K. banks' funding could arise from concerns about their exposures to vulnerable euro-area countries," states a recent Financial Stability Report from the Bank of England.
In other words, worries about the banks' high exposure to indebted eurozone countries, may prompt investors to refuse to fund banks and prompt a full-blown credit crunch, Aldrick writes.
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