While Britain uses the pound, not the common currency, and the country’s banks are strong, the rest of the European Union is its largest trading partner. In addition, British officials have become increasingly concerned since the country slipped into recession earlier this year.
The measures revealed by Chancellor of the Exchequer George Osborne and Bank of England Governor Mervyn King are similar to programs rolled out by the United States during the depths of its financial crisis in 2008.
“We are not powerless in the face of the euro-zone debt storm. The government — with the help of the Bank of England — will not stand on the sidelines and do nothing as the storm gathers,” said Osborne, who heads the British Treasury.
Osborne’s remarks, made during an annual dinner with financiers in London and filled with references to war, show that British officials fear the euro zone’s crisis could escalate in the coming weeks.
Greece holds elections Sunday that may determine whether it stays in the euro zone. The outcome could have ripple effects throughout the world.
“This may be the most dangerous moment since the crisis erupted two years ago,” said Nicholas Spiro, managing director of Spiro Sovereign Strategy in London.
A number of other central banks also have taken steps in recent weeks to try to stave off financial contagion.
Central banks are facing pressure to act in part because political authorities have not moved fast enough to contain the accelerating crisis.
In the United States, the Federal Reserve has pledged to do whatever is necessary to protect U.S. financial firms from fallout from the European crisis. The Fed is also making dollars available to European central banks in exchange for euros.
The Fed’s policymaking board meets next week. It is weighing whether to undertake a new round of economic stimulus to boost the U.S. economy, which is slowing partly because of the problems in Europe.
China’s central bank has held off launching a stimulus program on the scale of the one it undertook two years ago, which was worth $596 billion. But in early June, the Chinese central bank reduced its benchmark interest rates for the first time since 2008 in an effort to invigorate China’s slowing economy.
In Switzerland, another large economy in Europe that doesn’t use the euro, the head of the central bank said Thursday that the bank was ready to purchase foreign currency in “unlimited quantities” to keep the franc from appreciating further and hurting the economy.
Those measures pale in comparison to what Britain announced Thursday.
The Bank of England said it would activate a program of emergency loans to give British banks a cushion in case the European financial crisis spills across the borders of the euro zone. In a highly unusual move, the British Treasury is backstopping the measures, which entail significantly more risk than the central bank has historically been willing to take. Without such support, British banks could have trouble meeting customer demand for loans — a problem threatening Spain’s and Greece’s banks.