Emergency action revealed to tackle 'worst crisis since second world war'

Sir Mervyn King has announced emergency measures to help banks and boost business lending after a warning from George Osborne that the "debt storm" raging on the continent had left the UK and the rest of Europe facing their most serious economic crisis outside wartime.

With one Spanish minister warning that the future of Europe could be decided within hours, the Bank of England will begin pumping a minimum of £5bn a month into City institutions within the next few days and the government expects to have a new "funding for lending" scheme for households and cash-starved small and medium-sized businesses in place within weeks.

The Bank and the Treasury believe their joint proposal, under which banks will receive cut-price funds provided they pass on the benefits to their business customers, could provide an £80bn boost to the stock of lending to the private sector and help alleviate growing fears of a second slump since the start of the financial crisis five years ago.

Both the governor and the chancellor used the backdrop of another day of financial and economic turbulence in the eurozone to express deep concern about the threat to Britain posed by Europe. With interest rates on Spain's 10-year borrowing hitting the 7% level and Angela Merkel insisting she was running out of patience with her fellow eurozone policymakers, King told a City audience at the Mansion House that there was a "large black cloud of uncertainty hanging over not only the euro area but our economy too, and indeed the world economy as a whole."

Osborne said things were likely to get worse in the eurozone before they got better and insisted that the time for decisions had come. Strongly defending the government's handling of the economy, the chancellor said it had been the hard-won credibility built up over the past two years that had allowed the Treasury and the Bank to take action.

Thursday night's announcements were designed to shore up confidence before this weekend's elections in Greece, seen as a possible trigger point for a new phase in Europe's debt crisis.

The Guardian