THE DANGER of the collapse of the euro has created an “exceptionally threatening environment”, the head of the Bank of England, Sir Mervyn King said as he warned British banks to prepare for the worst.

Meanwhile, his deputy, Paul Tucker, said the euro crisis is “exceptionally perilous”, telling journalists: “Anything could happen.”

British banks must move quickly to strengthen balance sheets  by cutting bonuses to staff and dividends to shareholders, though they should continue personal and business lending, Sir Mervyn said, at the publication of the bank’s six-month stability report.

“Faced with a crisis of the euro area system, we are seeing at first hand the costs of financial instability. The symptoms of the crisis have been widely reported. Many European governments are seeing the price of their bonds fall, undermining banks’ balance sheets,” he said. “In response, banks, especially in the euro area, are selling assets and deleveraging.  An erosion of confidence, lower asset prices and tighter credit conditions are further damaging the prospects for economic activity and will affect the ability of companies, households and governments to repay their debts.

“That, in turn, will weaken banks’ balance sheets further. This spiral is characteristic of a systemic crisis,” he said. Asked if the Bank of England is planning for the euro’s collapse, he said: “The government, along with the Financial Services Authority and the Bank of England are making a range of contingency plans.”