Bank of England says joint action only 'temporary relief'

1st December 2011, Comments 0 comments

Bank of England Governor Mervyn King said on Thursday that the coordinated central bank action was only "temporary relief," as he confirmed the BoE had "contingency plans" in case of a eurozone breakup.

King told a press conference that the BoE, together with Britain's government and financial watchdog, the Financial Services Authority (FSA), "are making contingency plans," although he refused to elaborate.

Last week, the FSA had already confirmed that Britain's banks were drawing up plans for the possible dismantling of the eurozone.

Amid fears of a eurozone collapse, central banks of the United States, the eurozone, Britain, Japan, Canada and Switzerland said on Wednesday that they would cut the cost of providing dollars to banks.

King said Thursday that the joint move "is a step forward and will help, but let me stress that this cannot be a solution to the underlying problems.

"All this can do is to help with some temporary relief to liquidity problems, but liquidity problems often reflect underlying solvency problems and in this case they do and those problems have to be tackled directly by the governments involved.

"Central banks... cannot resolve solvency problems, they can merely provide liquidity."

King was addressing a press conference after the Bank of England published a report in which it recommended that British banks "improve the resilience of their balance sheets without exacerbating market fragility or reducing lending."

Although not a member of the eurozone, Britain is a key trading partner of the neighbouring bloc.

© 2011 AFP

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