Banks and traders must prepare for a devastating market seizure as governments grapple with the escalating economic crisis in Europe, a Bank of England policymaker has warned.
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The Bank has prepared emergency liquidity arrangements to prevent a re-run of the last credit crunch.

Cheap and ready access to the liquid assets that oil the financial markets are under threat from both state-imposed capital controls and flagging confidence in the euro, Robert Jenkins, a member of the Bank's Financial Policy Committee, told the Global Alternative Investment Management conference in Monaco.

Without easy access to liquidity, markets could seize in a re-run of the credit crunch after the collapse of Lehman Brothers, he warned.

"Those of you who traded asset backed securities in 2008 can testify to the speed with which liquidity can disappear," he said. "Yet despite these examples, many continue to assume that ... 'liquidity' is free and will be freely available.

"Short-selling bans in Europe and bond purchase penalties in Brazil are a foretaste of the future. I recommend that you send your best and your brightest to the library to research state intervention in the post war period. It could come in handy. For like clean air and water, market liquidity is no longer limitless and no longer free."

His comments came just minutes before the Bank launched its first £5bn emergency liquidity auction under the arrangements unveiled last week to protect Britain's lenders from a crunch. At least £60bn will be made available to Britain's banks over the next 12 months.

Under the Extended Collateral Term Repo operation, banks can swap low-grade assets for high-grade ones that meet regulatory liquidity requirements, paying a cut-price 0.75pc for the funds.

Mr Jenkins' comments in Monaco illustrated the urgency of the scheme. Markets are facing another crisis due to the resurgence of "cross-border" risks in the eurozone, he warned, and a calamity will not be averted unless confidence is comprehensively restored in the single currency project.

"The spectre of cross border risk is back. Its impact is difficult to quantify but must not be underestimated," he said. "Capital is leaving the very countries that need it - and flowing to the countries that don't. At the same time financiers are cutting back on credit while they determine and manage their cross-border risk.

"It is not enough to contain an accident. The challenge is no less than to restore faith in the entire euro construct. Confidence must be such as to completely banish cross-border risk from financial planning.

"Until and unless this is accomplished the euro zone credit system has the potential unravel, the free flow of capital will be impaired and the economic recovery constrained."