World economy shaky despite massive bank rescues

The U.S. government's recent decision to save banking giant Citigroup Inc. may ultimately be remembered as the last high-profile bank rescue in the great financial crisis of 2008, but that doesn't mean it's business as usual in global markets.

Even though few analysts expect another major banking group to collapse or require a bailout of similar scale, banks, particularly in Europe and the U.S., remain reluctant to lend to each other or to businesses and consumers.

The banks are spooked by recent months' events, and may be preparing for worse to come in commerce and industry. It's clear that the liquidity crunch, combined with fearful consumers' reluctance to spend, could spell doom for many businesses and feed a spiraling global economic crisis.

Though stock markets round the world have rallied for four consecutive days in the wake of the Citibank bailout, credit markets remain clogged. Hard-pressed businesses, particularly in the retail sector, urgently need working capital to see them through the tough times ahead.

"The eye of the storm happened last month but as we all know storms can last a long time," said Neil Mellor, an analyst at Bank of New York Mellon.

Though governments around the world appear to have been relatively successful in patching up their financial institutions by making unprecedented amounts of money available to them — buying stakes and guaranteeing assets — the banks have not shown much inclination to resume lending at more normal levels.

The British authorities have even warned banks that if they don't start behaving normally, regulators could step in and fully nationalize the sector, arguing that the British taxpayer did not step in to save banks seven weeks ago to get nothing in return.

Mervyn King, the governor of the Bank of England, told legislators Wednesday that the failure of the banks to lend is the "single most pressing challenge" to domestic economic policy and that if they don't break the gridlock then all options remain on the table.

"It would be a serious error to rule out measures which may prove necessary," he said.

But the banks, particularly in the U.S. and Britain, have to repair their balance sheets, which were battered in any case partly by over-exurberant lending to households.

"British and American mortgage and consumer loans have collapsed — and rightly so," said Brian Reading, an analyst at Lombard Street Research.

More important to the length and depth of the recession is bank lending to companies, and so far, said Reading, the evidence shows that loans have held up for now.

The 30,000-strong work force at general retailer Woolworths Group PLC, which went into administration Thursday, would likely disagree.

Woolworth's said it appointed accountants Deloitte to take control of Woolworths PLC, its retail arm comprising its stores and distribution centers, which fell victim to the sharp deterioration in the economy and the mounting caution of banks.

Having borrowed to the hilt, Woolworth's was left pleading with its lenders for more capital to see it through the crucial Christmas shopping period, which in most years accounted for some 80 percent of the company's revenue.

Unfortunately for the 98-year old retailer, the banks, which include Bank of Ireland PLC unit Burdale and GMAC, pulled the plug, partly because the company was not able to get insurance coverage for its supplies.

Lombard Street Research's Reading said it's not the banks' job to take on risky business lending — the type that got them into trouble — just because of the recession.

"They have lost most of their shareholders' money and the British Treasury is now threatening to nationalize them unless they risk losing what remains," said Reading.

Aside from full-scale nationalization of the banks, governments around the world will continue to face mounting pressure to help businesses through the difficult months ahead.

Speculation is rising that the incoming Obama administration in January will have to bail out the Detroit carmakers, despite their gloomy prospects. Other "worthy" candidates for more government support will likely emerge ahead of the arrival of President-elect Barack Obama.

"Individual governments and central banks may well need to countenance more support for banks in 2009, do even more to protect jobs and also to support industries deemed of national importance. Never let it be said that protectionism is dead!" said Howard Wheeldon, senior strategist at BGC Partners.

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