Tuesday, June 28, 2011

UK's small businesses would be hardest hit by Greece default, Bank of England warns

Britain's small businesses would be the worst UK casualties of a Greek default if the repercussions spread through the financial system, Bank of England policymakers have warned.

“The small and medium-sized enterprise sector is particularly vulnerable to a banking crisis,” Adam Posen, an external member of the Monetary Policy Commitee (MPC), said. “When banks contract, banks then only do gilt-edged lending. We’re already seeing some of that.

“If there were to be a financial problem in the euro area, that would probably reduce liquidity for small and medium-sized enterprises in this country. That’s serious about employment, that’s serious about investment, that’s serious about inflation.”

His concerns were picked up by the Bank’s Governor Sir Mervyn King, who confirmed fears that Britain’s banks “could be drawn in” to a sovereign default crisis if it spreads beyond Greece.

“One of the things going on at present is a significant contraction of bank balance sheets,” he said. “The sector that is suffering most from that, is that those parts of the economy that have to rely on banks are suffering – and that is very much the SME sector.

“Lending to businesses by banks is still falling. That is not an environment that is easy for small business. Clearly that is a concern for the long-run health of our small business sector.” (read more)