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Britain is on the brink of a second credit crunch, the Bank of England warned as it slashed its growth forecasts for the economy and raised the prospect of a double-dip recession.
The eurozone crisis has left UK banks unable to raise the funding they need to make loans to businesses, evoking the spectre of the crunch that followed the collapse of Lehman Brothers.
And on one critical measure — the cost of insuring banks against going bust — lenders are already facing tougher conditions than at the height of the crunch, the Bank said.
Sir Mervyn King, the Bank’s Governor, said that because of the eurozone crisis, households, companies and banks face a period of extraordinary uncertainty, including a possible slide back into recession. “There is weakness over the next few quarters. No one can know what precisely the outcome will be,” he said.
“In the last three years, we have seen extraordinary events. Who knows what’s going to happen tomorrow, let alone next month?”
The report warned that if banks cannot find sufficient funds it will “curtail the amount they lend to businesses and households, through reductions in the availability of credit or increases in loan rates”.
The Coalition has tried to enforce a rise in loans, but banks must raise a further £200 billion-£300 billion next year just to maintain their current lending levels.
Averting a second credit crunch will depend on whether the eurozone can find a solution to its debt problems, Sir Mervyn said.