BANK of England policymakers have warned small businesses will bear the brunt of the eurozone crisis.
A key moment for Greece will come today when the country’s Parliament votes on a new round of austerity measures.
Speaking before a House of Commons committee yesterday Bank governor Sir Mervyn King confirmed it has discussed contingency plans with the Government in the event of a Greek debt default.
Sir Mervyn noted the market is pricing in an 80% chance of a default. He refused to discuss the plans in detail but confirmed the Bank now has systems in place to auction funding to financial institutions if money markets dry up as they did in the 2008 credit crunch.
The Bank is concerned that while UK banks have little direct exposure to Greece, they do have dealings with continental or American banks that could themselves be vulnerable to a default, prompting a wider banking crisis.
Greece has some €340 billion (£304bn) of debt outstanding of which €100bn (£90bn) matures before the end of 2014.
Adam Posen, an external member of the Bank’s rate-setting Monetary Policy Committee, said: “The small and medium enterprise sector in the UK is particularly vulnerable to banking crises.”
Mr Posen, who met business people in Aberdeen this week, said smaller companies lacked alternative sources of funding.
“When banks contract, banks then only do very gilt-edged lending. We are already seeing some of that.”
Mr Posen, who has called for more money to be pumped into the lacklustre UK economy, added: “If there were to be a financial problem in the euro area or say through the US banks, that would probably reduce liquidity for small and medium enterprises in this country.”
He said this would have a serious impact on unemployment and investment.
Mr Posen called for more action to encourage bank competition. “I think we need to have more than four main high street banks in this country.”
He told MPs on the Treasury Committee that instead of handing shares in part-nationalised Royal Bank of Scotland and Lloyds to the public, the Government should use its stakes to help new entrants into the market.
Colin Borland, head of external affairs at the Federation of Small Businesses Scotland, told The Herald: “They are right: small businesses bear the brunt when systems have these shocks. That is what we have seen in this most recent episode.”
He added: “We would eye a market with four big players enviously in Scotland. We only have two.”
But he added that a more significant marker of competition is how many products and services are being offered to small businesses.
MPC member David Miles said inflation will likely stay “markedly above the target level” of 2% for the next two years, before falling. The consumer prices index measure of inflation was 4.5% in May.
He added: “The key thing here is there is evidence that looking further down the road, households clearly believe inflation will not come back down to target at any time. I don’t think that’s the case.”
Sir Mervyn said that any move to tighten policy would come first as a rise in rates from the current 0.5%. Then the Bank would look at asset purchases to reverse its quantitative easing programme.
Mr Miles added that borrowers are unlikely to be hit with the full force of a base rate rise as they did not benefit from the entirety of the previous cuts. “I think it is likely that at a point when Bank rates go up that is not reflected one to one in mortgage rates.”
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