(Updates with UBS forecast in sixth paragraph. (See EXT4 for more on the European debt crisis.)
Nov. 29 (Bloomberg) -- Bank of England Governor Mervyn King said the U.K. is being “increasingly threatened” by the euro- area crisis, and authorities must be ready to act if it continues to escalate.
“What we have to do is to be ready and prepared with contingency plans and to make sure that as far as possible our banking system is as robust as possible to withstand whatever shocks that come from the eurozone,” King told lawmakers at a Parliament committee in London yesterday. There are “early signs” of a credit crunch emerging in euro area in the difficulties banks have in accessing funding, he said.
The central bank restarted bond purchases in October for the first time in almost two years, citing risks from the crisis in the euro area, and some policy makers have said more may be needed. As the region’s leaders struggle to prevent turmoil spreading to core countries such as Germany and France, King has said the bank can’t quantify the possible impact of the “most extreme events” in the region.
“There are many things that could happen if developments in the eurozone get worse, but I honestly don’t think it makes much sense to pretend we can precisely know how this will play out,” he said.
Finance ministers from the 17-member monetary union meeting in Brussels today are under increasing pressure to step up their response to the sovereign debt crisis. They will debate using their bailout fund, the European Financial Stability Facility, to insure sovereign debt with guarantees.
UBS AG cut its 2012 and 2013 forecasts for the U.K. economy this week. It sees a contraction of 0.1 percent next year and growth of 1.1 percent in 2013, having previously forecast expansion of 0.7 percent and 1.3 percent respectively.
“Perhaps we are nearing a crescendo point in the sovereign debt crisis and a solution may emerge soon,” said Amit Kara, an economist at UBS in London. “We think that’s unlikely, but regardless, the damage has been done with U.K. exports likely to stop dead in its tracks in 2012.”
At a bond auction today, Italy was again forced to pay above the 7 percent threshold that led Greece, Portugal and Ireland to seek bailouts. The yield on its 10-year debt rose 13 basis points to 7.36 percent as of 11:41 a.m. in London. Similar-maturity Spanish yields fell five basis points to 6.52 percent, reversing an earlier increase.
“I don’t think it’s possible to continue indefinitely, with this degree of fragility” King said. “One way or another, something will happen.”
King also said that while British banks are better capitalized than before the financial crisis, “there is certainly no room for complacency.”
“The deleveraging in the euro area is leading to early signs of a credit crunch and it could get worse,” he said. “Undoubtedly there are real problems. You can see that even for banks in this country, and even U.S. banks, the funding problems have worsened since August.”
Financial stocks have suffered as Europe’s debt crisis worsens. The Bloomberg Europe Banks Index has fallen 36 percent this year, compared with a 16 percent decline by the Stoxx Europe 600 Index.
The Bank of England cut its 2012 growth projection to 0.9 percent from 2.2 percent this month, and King said today the revision was largely due to the impact of the euro-area debt crisis. It expanded its bond-purchase program by 75 billion pounds ($117 billion) to 275 billion pounds in October.
The Organization for Economic Cooperation and Development forecast yesterday that the central bank will increase the target for bond purchases by 125 billion pounds by early next year. Minutes of policy makers’ November meeting showed some officials said an increase in QE “might well become warranted in due course.”
While policy maker Martin Weale said in an interview on Nov. 25 that there may be a “strong case” for more stimulus, he added that there isn’t a need to announce such a move until the current round of bond purchases ends in February.
Speaking alongside King yesterday, policy maker Paul Fisher said that 75 billion pounds was the “minimum” the central bank needed to do when it expanded its stimulus in October.
“I don’t know yet the amount of QE we will actually do,” he said. “If we feel the need to do more, we will do more.”
--Editors: Fergal O’Brien, Simone Meier
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