The credit crunch threatens the lifeblood of globalisation by constricting access to private sector cross-border capital flows. We fear that the response - nationalisation of the banks - is the antithesis of globalisation, and may end up killing rather than curing the patient. While the scale of the recapitalisation of the banking system by taxpayers is impressive, it remains unclear whether the aim is simply to slow or halt the pace of global deleveraging, or whether the intention is to reinvigorate the credit- creation process, especially at the cross-border level.

The risk of systemic banking failure has not been eliminated. It has simply been transferred from the global banking sector to national governments. This is already apparent in credit default swap spreads, where the cost of credit default insurance in the banking sector has fallen at the same time as the risk of sovereign credit default has risen. Should the recession be deeper and last longer than expected - and two years of negative gross domestic product growth cannot be ruled out, particularly in Europe - governments could find themselves struggling to meet their newly acquired contingent liabilities.