The markets are still on tenterhooks. The authorities across the world made Herculean efforts over the weekend to stabilize the banking system—and made considerable progress.
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Most of the UK banks have been rescued with a £37 billion (Rs3 trillion) cash infusion underwritten by the state. The euro zone countries have agreed on a framework to recapitalize their banks and provide them with medium-term funding. The US has indicated it will do something similar. The International Monetary Fund has offered to spray billions around emerging markets to prop them up. And there may even be a deal between the US government and Mitsubishi UFJ Financial Group to shore up Morgan Stanley.
So far so good.
No wonder the initial reaction of stock markets in Asia and Europe was to breathe a sigh of relief.
But it is still too early to say the crisis is over. New problems are still popping up. Many countries in eastern Europe look ropey. If there are bankruptcies there, Western banks which are exposed to the region will be caught in the backlash. Speculators across the globe who made highly leveraged bets are failing to make margin calls. As banks liquidate the collateral, they may find it doesn’t cover their loans.
What’s more, there are still holes in the safety net. The Europeans haven’t yet spelt out their schemes, let alone how each bank will be recapitalized. Meanwhile, the shape of what the US is planning is still up in the air.
Finally, there are currently only reports on Morgan Stanley—rather than an announcement. The US is reportedly assuring the Japanese that they will be protected if Morgan Stanley subsequently needs a state-inspired recapitalization. All this is good so far as it goes, but it still doesn’t answer how the bank will meet its ordinary funding needs.
The overall message is positive. But the race against time continues.