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Bank chief's verdict on debt woes
Sir Mervyn King has delivered a hard-hitting verdict on Europe's debt woes as he admitted the crisis will hamper UK growth this year and next.
The Bank of England governor said the single currency area was "tearing itself apart without any obvious solution" while he also confirmed the Bank was working on contingency plans in the event of a worst-case scenario for the euro.
Warning that the UK was at risk of being in the path of the eurozone storm, Sir Mervyn ruled out a return to pre-financial crisis levels of growth before 2014 - with the Bank now expecting little growth in 2012. He repeated his calls for European leaders to deliver a "credible solution" to the region's crisis.
In a further blow to households, the Bank said the rate of inflation will fall more slowly than previously expected, remaining above the Government's 2% target for the next year or so.
The comments in the Bank's quarterly inflation report came as financial markets suffered further losses after Greek leaders braced themselves for fresh elections after talks to form a coalition government failed.
But even after slashing its growth forecasts to 0.8% in 2012 and 2% in 2013, down from 1.2% and 3% respectively, some economists said the Bank was still being "too optimistic", prompting more quantitative easing later this year.
Sir Mervyn warned that even with a "credible and effective" response from eurozone leaders, a prolonged period of sluggish growth and heightened uncertainty was still likely for the region.
He said: "We are navigating through turbulent waters, with the risk of a storm heading our way from the continent. We don't know when the storm clouds will move away."
Sir Mervyn confirmed plans were being drawn up by the Bank, the Treasury and Financial Services Authority in the event of a major financial catastrophe, such as the break-up of the eurozone. He added: "Contingency plans are being discussed and have been for some time."
While the Bank said it did not see a "meaningful way" of factoring into its projections an extreme financial event, it said the biggest risk to recovery stemmed from the single currency bloc, the UK's main trading partner.