Britain unveiled extraordinary plans Thursday to inject billions of dollars of cash into its banks to try to protect its financial system from the economic turmoil spreading across the euro zone.
The announcement came the same day that Spain and Italy — two of the continent’s largest economies — saw their borrowing costs soar, with Spain’s reaching record levels.
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.
Separately, the British Treasury will provide loans to banks at below-market rates so they can provide credit to individuals for buying homes and businesses for expansion. Such an increase in lending and borrowing can generate economic growth.
“Together we can deploy new firepower to defend our economy from the crisis on our doorstep,” Osborne said.
Bloomberg estimated that the plan would pump at least $7.8 billion a month into the country’s economy.
Earlier on Thursday, Spanish bond yields broke through the unofficial benchmark of 7 percent following an announcement by Moody’s credit rating company that it would downgrade Spain’s credit by three notches, from A3 to Baa3, one grade above junk status. A number of Spain’s neighbors were forced to seek bailouts when their borrowing rates hit that level. While rates stayed at 7 percent for just about a minute before falling to close at 6.93 percent, the psychological damage already had begun to spread.
At an Italian bond auction Thursday, the government paid 5.3 percent for $3.76 billion in three-year notes. That compares with 3.9 percent for a similar sale one month ago.
In the hours following the rise in bond yields, European leaders from a half-dozen countries called for calm and vowed to take new measures to shore up the euro-zone economies.
France, Spain and Italy have backed radical measures such as bonds backed jointly by the 17-member euro zone or guarantees on bank deposits. But German Chancellor Angela Merkel has rejected proposals that would put more stress on her country’s finances.
In a radio interview, Spain’s foreign minister, Jose Mauel Garcia-Margallo, accused Germany of being short-sighted in its refusals: If it “throws one country to the wolves, that will affect everyone.”
In Berlin, Merkel told the country’s parliament that “miracle solutions” such as jointly backed “euro bonds” were “counterproductive” and that “Germany’s strength is not infinite.”
Douglas Elliott, an economic studies fellow at the Brookings Institution, said he did not expect a resolution until things get worse, comparing it to the debt ceiling face-off that took place between Republicans and Democrats in Congress last year, which was resolved just before the United States faced a possible default.
“The political leaders have to be standing on the edge of a cliff looking over before they will be able to take the steps they need to take to solve the whole crisis,” Elliott said.
Spiro said that nothing less than a truly overwhelming response may be needed to resolve the crisis and restore order to financial markets.
“It’s been two years of dithering and half measures,” he said. “Everyone is now looking for shock-and-awe tactics. Anything short of that won’t calm the markets. We’re basically running out of time.”