Britannia Radio

TELEGRAPH Business News   15.10.08
Bank crisis ends as the economic crisis begins
The taxpayer rescue of the entire western financial system is more or 
less complete.

By Ambrose Evans-Pritchard

Tuesday's sweeping move by US Treasury Secretary Hank Paulson to 
guarantee financial debt and inject state capital into America's 
biggest banks brings the US into line with Britain and Europe, where 
almost $3,000bn (£1.7 trillion) has been vouched in the biggest bail-
out of all time.

If the history of financial crises is any guide, the violent credit 
shock of 2007-2008 has largely run its course. The sovereign states 
of the US, Britain, France, Germany, Italy, Spain, and Holland have 
broad enough shoulders to carry their load of fresh liabilities - 
even if Iceland does not.

We are now moving to the next phase, a grinding slump across the G7 
bloc of leading industrial economies as years of excess debt are 
slowly purged from the system. This is when people start to lose 
their jobs in earnest.

Professor Nouriel Roubini from New York University, the vindicated 
prophet of the crisis, says he can at last glimpse light at the end 
of the tunnel.
"Policy makers peered into the abyss of systemic collapse a few steps 
in front of them and finally got religion. While the economic damage 
is already done, and the global economy will not avoid a painful 
recession, rapid action will prevent a decade-long stagnation like 
the one in Japan after the bursting of its real estate and equity 
bubble," he said, predicting a 'U-shaped' slump lasting 18 to 24 months.

World trade has already stalled. The Baltic Dry Index measuring 
freight rates for shipping has crashed by 82pc since May, touching a 
five-year low yesterday. Container vessels are leaving Asian ports 
with 20pc spare capacity. "We're heading into a global recession," 
said Simon Johnson, the IMF's former chief economist.

The whole OECD bloc of rich economies is crumbling in unison - a rare 
event. Such is the dark side of globalisation. Asia is deeply linked 
into the debt bubble through trade effects, which is why Japan and 
Singapore are contracting as sharply as the West.

Oil-rich Russia had to step in yesterday with a $56bn package to 
recapitalise banks and cover foreign loans. Brazil has seen a triple 
rout in its stocks, bonds, and currency. The Gulf states of Qatar and 
the Emirates have had to support their financial systems. Even Norway 
needed a $55bn bank rescue over the weekend.

The French economy is officialy shrinking. Germany's exports fell 
2.5pc in August, led by the car industry. BMW has begun to idle three 
plants; Opel has shut a factory in Eisenach for three weeks.

"The eurozone is in recession already," said David Owen from Dresdner 
Kleinwort. "The consumer downturn has begun, but the cuts in business 
spending that you see late in the cycle have yet to come. This is 
going to get a lot worse," he said.

Brussels invoked its "exceptional circumstances" clause yesterday, 
allowing EU states to breach the budget deficit limit of 3pc of GDP. 
But leeway for fiscal stimulus is already constrained. Ireland had to 
raise taxes yesterday to stop borrowing spiralling out of control. 
Its deficit will reach 6.5pc.

Former Federal Reserve chief Paul Volcker, a harsh critic of the debt 
bubble, says there is no alternative to the Paulson bail-out measures 
at this late stage, however "distasteful" they may be. "They will 
turn an inevitable recession into something more manageable," he said.

Be thankful for small mercies.