Mervyn King
© PACrisis: Sir Mervyn King, pictured speaking yesterday, warned resolving the eurozone crisis was 'beyond the control' of any UK authority
  • Sir Mervyn King warns eurozone crisis 'beyond the control' of any UK authority
  • Bank of England preparing for the worst case scenario
  • Downing Street says Britain is in the grip of a second credit crunch
  • But Governor says Britain's banks are among the strongest in the world

  • Mortgage rates are set to soar as the Governor of the Bank of England warned the 'extraordinarily serious and threatening' crisis in the eurozone is damaging Britain.

    The Bank's financial policy committee said banks were facing higher borrowing rates and may try to pass this on within months - resulting in a 'significant increase' in lending rates.

    The sobering report came as governor Sir Mervyn King issued a dire warning about the threat posed to Britain by the euro crisis - because our banks have more than £500billion tied up in European institutions.

    Sir Mervyn said the situation was spiralling out of control and deteriorating conditions in the markets were 'characteristic of a systemic crisis'.

    'Faced with a crisis of the euro area system, we are seeing at first hand the costs of financial instability,' he said.

    As a result, the Bank's governor:
  • Ordered UK banks to slash bonuses to staff and dividend payments to shareholders to help prevent financial disaster as Britain braced for a second credit crunch
  • Said lenders needed to put their houses in order to shield themselves from the 'extraordinarily serious and threatening' financial storms.
  • Insisted banks must continue to lend to households and businesses despite pressure to keep more funds in reserve.
  • The Financial Stability Report raised the spectre of a rerun of the last credit crunch that crippled the banking system and plunged the global economy into recession.

    The Bank gave no estimate of the likely rise in mortgage rates - effectively to pass on increases in the inter-bank lending rates. But even a one per cent increase would add almost £1,000 a year to the cost of a typical £140,000 mortgage.

    One economist said the report 'read like an obituary' and suggested the unusually stark language showed that 'alarm bells are ringing' at the Bank.

    Deputy Governor Paul Tucker described the situation as 'exceptionally perilous' and warned that 'anything could happen'.

    The warnings came just a day after central banks around the world joined forces to pump 'unlimited' amounts of cheap money into the financial system in a desperate bid to prevent another crash.

    The emergency operation - led by the U.S. Federal Reserve with the support of the Bank of England - was launched amid fears that at least one major European bank may be teetering on the brink of collapse.

    Downing Street has already said Britain is 'experiencing a credit crunch'. Yesterday Sir Mervyn confirmed the grim prognosis.

    Plans must be put in place to stop debt 'exploding to ever more sustainable levels,' he said.

    He added: 'An erosion of confidence, lower asset prices and tighter credit conditions are further damaging the prospects for economic activity and will affect the ability of companies, households and governments to repay their debts.

    'That, in turn, will weaken banks' balance sheets further. This spiral is characteristic of a systemic crisis.'

    The report said that British banks were among the strongest in the world. But it is feared that the chaotic collapse of the eurozone would leave UK banks nursing heavy losses and plunge the economy into crisis.

    The report showed that UK banks have £578.5billion tied up in Europe. Sir Mervyn said: 'The interconnectedness of major banks means that banking systems and hence economies around the world are all affected.

    'Here in the UK, we must try to bolster the resilience of our financial system, better to withstand the storms that may come in our direction.'

    He said banks should 'limit' the amount of money they hand out to staff and shareholders to 'improve the resilience of their balance sheets'.

    Banks are expected to pay out a whopping £4.2billion in bonuses to staff this year.

    The Bank's report recommended that banks raise more money by selling shares - which could see the taxpayer inject yet more cash into Lloyds Banking Group and Royal Bank of Scotland.

    He said the Bank of England, the Government and the Financial Services Authority are drawing up 'contingency plans' for the break-up of the euro.'Maybe the eurozone won't break up, maybe it will continue in various forms but maybe there will still be questions of default,' he said. 'None of us really know.'