THE debt crisis engulfing the eurozone poses the biggest single threat to Britain's financial stability, a new risk watchdog warned yesterday, as David Cameron claimed victory in ensuring the UK was not party to any second bailout of Greece.

The Bank of England’s financial policy committee pointed to a potential domino effect and said that while British banks had limited exposure to beleaguered countries such as Greece, the impact on the likes of Germany and France could have a knock-on effect on banking conditions, which might affect the UK.

“Sovereign and banking strains are the most material and immediate threat,” reported the committee.

“Market concerns remain over fiscal positions in a number of euro area countries and the potential for contagion to banking systems,” it added.

The committee recommended banks be told to keep more of their profits as they faced threats from the eurozone debt crisis and homeowners not being able to repay their mortgages.

Sir Mervyn King, the bank governor, refused to liken the eurozone debt crisis to the collapse of Lehman Brothers –which triggered the global financial crash – saying the only thing it had in common was that “it’s a mess”.

He argued the bailout of Greece was only a temporary measure, saying the problem would only be solved when countries got to the heart of their debt problem by tackling their deficits.

“Right from the start of this crisis, people wanted to believe it was a crisis of liquidity and we need to accept it’s a crisis based on the build-up of large amounts of debt.

“The belief that we lend a bit more will never be an answer, but it can buy more time to put in place a fundamental solution,” added Sir Mervyn.

The Prime Minister – due in Edinburgh today for Armed Forces Day – supported the governor’s comments. He said at the end of the two-day EU summit in Brussels: “Every bank needs to make absolutely clear what its exposure is. We need to make sure all our banks are being strengthened in terms of their capital reserves and what they can withstand.

“I am confident that that is taking place in the UK; we need to make sure it takes place right across Europe.”

Mr Cameron also made clear he had secured assurances from fellow EU leaders that the European Financial Stability Mechanism, to which Britain is signed up, would not be used to raise funds to prop up the Greek economy. Instead, a separate mechanism involving only members of the eurozone would be used.

EU leaders approved another tranche of bailout money for Greece provided its MPs next week agree a new austerity package involving more spending cuts and tax rises.

In a separate development, Tony Blair, the ex-Prime Minister, made it clear he disagreed with his former Cabinet colleague Jack Straw that the Greek crisis meant the euro was doomed, saying the single currency would survive its current problems. “I do not take the view some people take that Britain joining the euro in the past or now would be a disaster. But I always said unless you could make a compelling case for it economically, you were never going to win a referendum. The case for Britain joining is not compelling. It may become that at a certain point,” he said.

Mr Cameron gave such a view short shrift saying: “It would be a dreadful idea for Britain to join the euro. As long as I am doing this job, there is no prospect of Britain even contemplating joining.”

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