THE Bank of England is making preparations to support UK banks in the event of a break-up of the eurozone, deputy governor Charlie Bean confirmed yesterday, describing the present state of the single currency area as a “worrying situation”.

Mr Bean said that the Bank has recently introduced a temporary loan facility as a precaution, for use in the event of contagion from the eurozone crisis endangering British institutions.

The deputy governor predicted “pretty flat” economic conditions in the UK over the next six months, and did not rule out a “double-dip” recession. But he forecast that a sharp decline in inflation would see spending and growth begin to rise again by the time of the Olympics in the summer.

He did not rule out a further round of quantitative easing at the time of the Bank’s Monetary Policy Committee (MPC) meeting in February.

In an interview on BBC Radio 4’s World at One, Mr Bean was asked if he feared a collapse in the single currency, with one or more of the 17 member states leaving the euro.

He replied: “I don’t want to put probabilities on it breaking up, but it is clearly a worrying situation.

“Countries eventually may feel that they are better off outside the eurozone than in it.

“One thing that is important to stress is that it is not easy for a country to leave. It is quite a disruptive thing.

“If, say, Greece were to decide to leave and reintroduce the drachma, what you would probably find is that immediately people would take money out of Greek banks, the Greek bank system would be in great difficulties, businesses would find some of their assets and liabilities would be redenominated in drachmas while some would stay in euros, they could well find themselves going bankrupt. It’s a very, very costly direction to go.”

Mr Bean made clear that Britain would not be immune from the impact of a break-up in the eurozone, even though it is not a member of the single currency.

Problems in the eurozone would hit British exporters and would also affect banks carrying heavy exposure to German and French financial institutions, which are themselves exposed to the more vulnerable economies of southern Europe.

He said: “If there are serious storms coming from across the Channel which we have to cope with, there are a number of things we can do.

“UK banks don’t have very heavy exposures to the troubled parts of the eurozone, but we would have exposures to French and German banks which have more significant exposures, so there could be linkages there.

“In those circumstances we would provide temporary loans to banks in difficulty. We have various facilities, and introduced a new one just a couple of weeks ago as a precaution. It’s not needed at the moment, but if we get into difficulty, we have got it there.”

Mr Bean said banks had been building up capital to act as a buffer against turbulence, by reducing the proportion of their profits handed out in dividends and bonuses.

Mr Bean said a return to recession was “always possible” but added that it would be a mistake to focus too closely on the question of whether small shifts in the data met the technical definition of a recession as two successive quarters of negative growth.

“Of course, it’s always possible for there to be a contraction in activity,” Mr Bean said. “Our central view on the MPC is that output is likely to be broadly flat through the last part of this year and the first half of next year.

“The broad picture is likely to be of output pretty flat, but as we go into next year inflation should be coming down pretty sharply and that will help to boost the rate of growth of household real incomes and help to support consumer spending.

“So by the time we get to the Olympics, hopefully I think things should be starting to turn round. In the second half of next year, we should see some return to growth.”

Mr Bean indicated that the Bank would like to see a return to higher interest rates, after holding the base rate at a record low of 0.5% since March 2009, in order to provide incentives to save. But he said that the record low could be expected to remain in place “for the time being”.

“From our perspective, the sooner we can get back to a world of normal interest rates, the better,” said Mr Bean, who added he had “every sympathy” with those whose income from savings has been drastically reduced over recent years.

But he went on: “We feel that it makes sense to preserve this world of rather low bank rates for the time being, but no doubt the time will come when it will be appropriate to start raising bank rates again.”

And he made clear that the MPC is ready to consider printing money again in a new round of quantitative easing (QE) designed to inject vigour into the economy.

Asked if more QE was on the cards, Mr Bean said: “If we feel it is necessary to inject further stimulus in the economy to keep nominal spending growing and prevent inflation falling too low two or three years out, then we will certainly be willing to do more.

“But we don’t really need to prejudge that now. We can wait and see what’s happened by February. There may have been a lot of developments in the eurozone and UK by then.”

Mr Bean said it would be wrong to think that the UK’s economic prospects were entirely gloomy.

“It is always very easy to feel gloomy about the economy, particularly when things might be turning down,” he said.

“But the one thing we know about economies is that they do tend to be self-righting.