HOWEVER hard-hearted the observation, it is frequently true that in crisis there is also opportunity.

There are many (including myself) who suspect that in Europe some of the current sense of crisis has been tacitly encouraged by politicians in order to make more concrete progress in addressing the structural issues with the single currency.

Where else could there be opportunity? One of the answers is, I believe, in the UK. The logic is very simple. The eurozone sovereign debt crisis, our position outside the single currency area and the present government’s rapid action in beginning the process of addressing previous budgetary excesses have combined to produce unusually favourable borrowing costs for HM treasury. Judging by the market interest rate on longer term debt, with 10-year Gilts yielding only around 2.6% (compared to 2.25% in Germany, but over 5.5% for Italy), bond investors have been implicitly valuing our creditworthiness to be virtually equivalent to that of economies with much stronger balance sheets, who are also less exposed to the chill winds blowing through the financial sector.

By comparison with the bigger problems in Europe, both our currency and our good name are perceived to be safe havens. We should not imagine that this situation will persist if, as we expect will ultimately be the case, the eurozone situation is stabilised. It is important that we should instead plan ahead for the time when the UK will have to stand on its own merits as a borrower, rather than on the de-merits of our neighbours.

It may be the case that by then Britain will have ridden out a good portion of our structural adjustment, which includes reduced government expenditures, reduced consumer leverage, a significant fall in real house prices and a decrease in financial services share of GDP.

However, if that is not so, the UK could be perceived to have some unique vulnerabilities. Specifically, the linkages between the health of our banks, house prices and consumer confidence are very tight. Most pertinently, since our banks fund their lending to consumers and businesses both through customer deposits and through so-called “wholesale” markets (borrowing from other banks who have excess deposits), their ability to lend depends upon both house prices and the UK governments’ ability to borrow.

If the interest rate charged to the UK government for its own borrowing rises (which may happen quite quickly once investors become more relaxed about lending to Europe), so would the price that wholesale markets charge the banks for the money they borrow (on top of deposits) which they use to fund mortgage loans. This would in-turn increase mortgage interest rates charged to home-owners, putting pressure on house prices, which in turn undermines the banks’ balance sheets, once again increasing borrowing costs.

The possibility of this vicious circle gathering pace could be forestalled by the UK government using this window of low interest rates to remove the risk. Were the Treasury to borrow, say £50Bn of 10-year money at 3%, then loan it on to the banks for the same 10-year period at 4%, the taxpayer (to the tune of £500m a year), the banks (lower funding costs) and the economy (more stable loan supply and pricing) would benefit.