BRITAIN is the largest country outside the euro zone whose exports and banks are tied closely to it. As the euro crisis worsens so does its impact on Britain's economy. Trade is depressed: the value of shipments to euro-zone countries, where two-fifths of British exports go, was 11% lower in April than six months earlier. The impact through financial channels may prove more powerful still. Businesses have trimmed stocks and postponed capital spending to conserve cash in case credit markets seize up.

They are right to worry. Anxiety about loans made by British banks to the euro zone's worst trouble spots has driven up their borrowing costs, in turn making loans to businesses and homeowners more expensive. The combined exposure of British banks to Ireland, Spain, Italy, Portugal and Greece amounts to $300 billion (£190 billion), according to the latest figures from the Bank for International Settlements (see chart). That is proportionately larger, at 12.7% of GDP, than the comparable exposure of Germany's banks. Because banks are so intertwined, even this figure does not fully capture Britain's vulnerability. Its banks are also owed $146 billion by banks in France and Germany, which have lent heavily to the euro-zone periphery.

Should any country leave the euro, or repudiate its foreign debts, it would start a cascade of losses through Europe's banking system. The Bank of England's monetary-policy committee judged that the chances of such a “disorderly outcome” had increased, according to the minutes of its meeting earlier this month. The mere threat depresses Britain's economy, which is why four of the nine-strong committee voted for a fresh round of bond purchases using central-bank money. A majority in favour of more “quantitative easing” seems assured by the time the committee next decides on July 14th.

Would further bond purchases be of much use? Investors fleeing the euro zone have parked money in Britain, driving yields on ten-year government bonds as low as 1.6%. The central bank might more usefully buy the bonds issued by commercial banks, lowering their funding costs and the interest rates they charge their customers. But it has been reluctant to do so. Judgments about whose bonds to buy, and the risks of making a loss, would take the bank beyond pure monetary policy into murkier waters best navigated by politicians. “The Bank has no democratic mandate to put taxpayers' money at risk,” said its governor, Sir Mervyn King, at an annual dinner for City bigwigs on June 14th.

But Sir Mervyn offered some alternatives. He outlined an emergency scheme to ensure that commercial banks can access six-month loans at a low cost directly from the central bank. At the first auction of such funds on June 20th, banks borrowed £5 billion at an interest rate of 0.75%. He also announced that a more radical plan is in the works to goose nervous banks into lending. Under this “funding for lending” scheme, the Bank of England, backstopped by the government, would make cheap long-term funds available to banks that sustain or increase lending to businesses and householders. The main lesson from past, unsuccessful, efforts to bolster the supply of credit is that the terms have to be sufficiently generous to banks for them to want to take part. Sir Mervyn could only reveal that the cost of funds would be “below current market rates.”