Unprecedented bailouts in historic times

Governments in both the U.S. and Europe had failed to restore confidence in financial markets until today. Last week, in spite of the co-ordinated half-percentage-point rate cut by the central banks and various aggressive bail-out packages, the costs of overnight interbank borrowing broke record every day and stock markets around the world had slumped by more than 20 percent. The fire sales seemed never-ending.

After the G7 nations gathering last weekend, the governments in the industrialized nations at last found themselves determined to rescue the financial system. The Fed and the European Central Bank pledged to provide unlimited amount of liquidity, in dollars and in euros, respectively, to unclog the credit markets. The European governments in total came up with a bail-out package of more than $2 trillion. Britain will inject capital directly into its ailing banks and guarantee any new debt they issue. Other European countries are likely to follow suit. The Treasury of the U.S. had also started discussion about buying stakes in banks, in contrast to its strong disapproval of it in the past weeks. With all the efforts, the G7 officials announce that they will "use all means to prevent a systematic collapse of the global banking system."

Stockmarkets around the world soared on Monday after the news, with the Dow Jones making the biggest percentage-point gain since the Great Depression. Investors rush back as they see investment values in stocks after the fire-sales last week. However, it is too early to claim that confidence is back. Although the stock market has bounced back strongly, the spreads in the credit markets are still near record highs. Moreover, as housing prices in both continents are unlikely to hit bottom soon, mortgage-related losses will continue to stress the financial system. With thier unprecented moves, the governments may be able to avert a severe global depression. But a global recession is now without doubt.