IF NOT scared, then London is deeply, deeply worried about the dangers of the coming days for the euro and the global economy, which threaten to end British hopes of injecting life into the country’s struggling economy.

In two moves, the governor of the Bank of England, Mervyn King, and the chancellor of the exchequer, George Osborne, have decided to flood the British banking system with new money in a bid to free up lending.

This the governor did not want to do, believing that banks guilty of not having been careful enough in the past with their lending should not be rewarded now with official help lest it lead to a dangerous dependence.

Until now, banks in need of such emergency infusions have had to go to the Bank of England’s discount window, a move that chief executives of such institutions are loth to do unless everyone else is doing it.

However, needs must. Under the new plans, £80 billion is to be printed and given to banks so that they can offer cheaper loans to businesses, which are still starved of capital by financial institutions that are now as risk-averse as they were once hungry for higher gains.

The new beast bears similarities to the actions taken last November by Mario Draghi, the president of the European Central when he flooded euro zone banks with cheap three-year borrowings that were used by the banks to buy euro zone government debt.

The Bank of England’s loans, which will be given in return for securities, will last for up to four years, though the rules to ensure that the banks do what they are supposed to do are far from agreed, sources in London said yesterday.

Similar actions have produced profits in the past for the banks, which is sitting on a £50 billion paper profit from its purchase of UK government bonds – a practice whereby the British have bought their own debt so that they can absorb more of it.

In addition, King will turn on the taps to offer £5 billion a month to the banks from a contingency fund set up last Christmas in case the Euro zone went into freefall, taking much of the global economy into uncharted waters.

“Today’s exceptional circumstances create a case for a temporary bank funding scheme to bridge to calmer times. Such a scheme could prevent an aggregate deleveraging of the banking system that might hold back recovery.

“Prior to the crisis, risk premia and bank funding costs were unsustainably low. Today, the black cloud of uncertainty has created extreme private sector risk aversion,” said King.

For Osborne and King, the problem is not that British banks are short of money, however. In fact, they have ample supplies, having been repaid £80 billion by businesses that have been happier to clear borrowings than invest.

However, they are hoarding what they have, say regulators, since they are fearful they will not be able to borrow on the international markets at any price if the Euro crisis leads to a freeze that surpasses anything seen at the time of the Lehman Brothers collapse. Such a view, expressed just days ago by the head of the Financial Services Authority, Hector Sant, is not greeted with joy among bankers, who insist they are being told ministers to lend, lend, lend while the FSA makes it impossible for them to free up the cash that they have.

In the past, efforts to encourage the banks to lend have met with limited success, if any.

The latest measure aims to reward banks who lend the most at the best prices, though doubters aplenty are to found in the City of London.

First, there is the issue of what kind of lending should be supported. Helping a small business to expand makes sense, everyone accepts, though increasing credit-card spending creates other risks, even if there is a short-term benefit for the high street.