Euro-Zone Debt Is 'Systemic Crisis'

By ALEX BRITTAIN And PAUL HANNON

LONDON—The euro zone's debt problems will cause widespread economic damage in a way "characteristic of a systemic crisis," Bank of England Governor Mervyn King said on Thursday.

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Associated Press

Bank of England Governor Mervyn King speaks to the media in central London Thursday.

He said the currency bloc's crisis is causing damage to governments and banks around the world. "We are seeing first hand the costs of financial instability," he said. "No-one could deny the current situation is extraordinarily serious and threatening," Mr. King said following the publication of the BOE's twice-yearly Financial Stability Report. He added that the situation could deteriorate to the point the euro zone is forced to break up.

Threats to the bloc's banking sector have created signs of a renewed credit-crunch in the region, as banks restrict lending to consumers and businesses, he said. If the euro-zone crisis isn't resolved then such credit tightening could spread to the U.K., he said.

Mr. King said provisions of liquidity—such as the concerted central bank action taken by the BOE, U.S. Federal Reserve and other major peers Wednesday—won't solve the euro zone's problems in the long term because the issue is one of solvency, not liquidity.

He called on euro-zone policy makers to take action as it is beyond the control of U.K. authorities to resolve the crisis. But the U.K. is drawing up contingency plans in the event of a euro-zone breakup.

Write to Paul Hannon at paul.hannon@dowjones.com