LONDON (AP) — Britain's government and the Bank of England on Thursday outlined a series of emergency measures designed to kick-start lending by banks and to protect the country's economy from the worsening debt crisis in the eurozone.
Treasury chief George Osborne said that one program, to be launched within weeks, would offer British banks access to cheap multiyear loans, linked to their lending performance.
The aim is to encourage banks to increase lending to businesses and individuals, amid concerns that caution sparked by worries over the fate of the eurozone could cause a new squeeze on available credit.
Bank of England governor Mervyn King said that, separately, the central bank would activate a liquidity facility announced last December, but so far unused, to inject about 5 billion pounds (US$7.8 billion) per month into the country's financial system.
Neither King nor Osborne offered precise details of how much the programs could be worth, though the measures could involve loans totaling up to 140 billion pounds (US$220 billion).
"We are not powerless in the face of the eurozone debt storm," Osborne said, making his annual address to a glitzy dinner in London's financial district. "Together we can deploy new firepower to defend our economy from the crisis on our doorstep."
With the U.K. economy officially in recession for the first time since 2009 after two quarters of shrinking gross domestic product, the International Monetary Fund had last month urged Britain's government and the central bank to do more to boost economic activity.
"The government, with the help of the Bank of England, will not stand on the sidelines and do nothing as the storm gathers," Osborne said. "We are rolling up our sleeves and doing everything possible to protect British families and firms."
King said the liquidity scheme would be announced in detail on Friday, but would offer six-month loans to banks at monthly auctions in exchange for a variety of assets, with the intention that the money is used to lend to companies or individuals.
He said the program was intended to handle actual or looming "market-wide stress of an exceptional nature."
The eurozone crisis has seen bank funding costs rise — forcing up borrowing rates for small firms — and created uncertainty about the future of Britain's most important trading partners. "It is an ugly picture," King said.
"Businesses and households are battening down the hatches to prepare for the storms ahead. The result is that lower spending leads to lower incomes and a self-reinforcing weaker picture for growth," he added.
The so-called "funding for lending" program would be similar to the Term Asset-Backed Securities Loan Facility, or TALF, implemented in the United States in the 2008 to spur more lending to consumers and businesses at cheaper rates.
The program would see the Bank and Treasury jointly offer "funding to banks for an extended period of several years, at rates below current market rates and linked to the performance of banks in sustaining or expanding their lending," King explained. "It could, I hope, be in place within a few weeks."
Andrew Tyrie, a Conservative Party lawmaker and chairman of Parliament's Treasury Select Committee, said the programs were vital to help Britain's economy survive turbulence from the eurozone.
"These are exceptional circumstances. They require exceptional measures," he said. "It is not just welcome that the Treasury and the Bank of England are working together to secure recovery. It is essential."
Britain's government has made previous efforts to boost lending to small businesses. In March, it launched a 20 billion pound (US$31 billion) program to encourage banks to offer cheap loans to smaller firms.
Osborne also acknowledged that a Greek exit from the eurozone could provide the impetus needed for the currency area to agree to closer integration — including a pooling of resources and a shared backstop for their banking sectors.
"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," he said. "One thing is for sure: if exit is the chosen route then the eurozone must have a very good plan in place to prevent contagion. The worst case for everyone would be exit without a sufficiently ambitious response."
He said that instability caused by doubts over Greece's future must soon end. "A time for decisions has come," he said.