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Britain has entered a second credit crunch, Downing Street said on Wednesday night, as America was forced to intervene to stop the eurozone crisis leading to a global financial collapse.
The US Federal Reserve spearheaded a scheme by central banks around the world, including the Bank of England, to lend money to ailing European banks that were struggling to borrow.
The emergency action to stop the international financial system from freezing up again was prompted by rumors that a European bank was facing difficulties and could not raise money. Panic started to spread through the German bond markets, which threatened to result in a credit freeze for European banks.
British banks have been warned by the Financial Services Authority, the City watchdog, that they must make preparations for the collapse of the single currency.
Downing Street sources insisted that the global economy was not facing a “Lehman’s moment”, in reference to the collapse of the American investment bank.
However, a spokesman for the Prime Minister said: “Clearly there is a very serious situation in the financial markets at this time.
“We are experiencing a credit crunch and that central bank action is about trying to mitigate the effects of that credit crunch. They are ensuring they have the capacity to take action.” The eurozone debt crisis has led to growing fears in financial markets about the stability of major European banks.
Investors, particularly US money-market funds, are increasingly worried that the European banks are exposed to huge losses on loans they have made in Greece, Italy and other indebted eurozone countries.