Central bankers are hoping to rescue the global financial system and head off a serious recession in the wake of the terrorist attacks on the US by flooding the markets with liquidity and cutting interest rates.

The Banks poured $80 billion (€87.48 billion) into the system yesterday in a bid to keep clearing systems running effectively.

The G7 bankers and finance ministers will hope this combination will work its previous magic and ward off a long-term recession. However, it is now almost certain that at least a short-term recession is on the way.

According to Mr Oliver Mangan, economist at AIB, the central banks have a track record of being able to manage crisis. But is it is unclear if the chaos of the last few days can be compared in any way with the crash in 1987 or the Asian market crisis a decade later, when their intervention proved successful. In both instances, the economies recovered a year later, following substantial injections of liquidity and large-scale interest rate cuts. However, war was not a factor, and success this time around may depend on the course of events over the next few weeks and the scale of any US retaliation.

But so far, the liquidity injection has stabilised markets. The European Central Bank poured almost €60 billion into the markets to ensure that banks could meet their obligations, with the Swiss and Japanese also providing funds. The fear was that some banks would hoard cash, thereby creating shortages, while others possibly located in the World Trade Centre would be unable to meet any open obligations.

At the same time, the G7 Finance ministers and central bank governors underlined their intentions with a fairly unequivocal statement yesterday afternoon. "We are committed to ensuring that this tragedy will not be compounded by disruption to the global economy. Our central banks have indicated that they will provide liquidity to ensure that financial markets operate in an orderly fashion. We will monitor economic developments and financial markets closely and stand ready to take further action as necessary."

According to Mr Mangan, this is fairly clear in pointing to further rate cuts above and beyond what the market had been expecting. "Both the Federal Reserve and the ECB are likely to cut interest rates by a full percentage point between now and the end of the year," he said. "Although the first cut may be put off a matter of weeks so as not to appear to be a direct consequence of the terror and to allow the central banks time to assess the real economic consequences."

The European finance ministers and central bankers also issued a statement saying that they stand ready in close co-operation with the US to provide all support which might be needed. Earlier, the key Economic and Financial Committee made up of top officials from finance ministries and central banks across Europe, as well as the European Commission, met to discuss the crisis.

The core problem, however, is that a short-term recession in the US now appears unavoidable, and that growth in the last few months of the year in the US is likely to be significantly negative. As a result, interest rates will be lower than would otherwise be the case.

In Europe too the situation is fragile, with consumer confidence already slipping before the atrocities of this week. European policymakers may now be admitting that the impact of developments in the US is likely to be significant on this side of the Atlantic, even if the European economy is now technically more closed than before monetary union.

It is still too early to be definitive about the likely impact on markets and economies. The US Federal Reserve asked other central banks yesterday to desist from trading the dollar, as dealers braced themselves for a huge sell-off of the currency. However, it seems clear from the central bank statements yesterday that a run on the dollar will not be countenanced.

There are also hopes that a huge surge in oil prices can be averted. After a spike upwards on Tuesday, prices stabilised somewhat when oil-producing countries made it clear they would attempt to keep prices in the $22 to $28 range. All depends in this regard on any disruption to supply.

A key cause for economic hope, according to economists, is that a sharp dip into recession now and for the rest of the year may also provoke a sharper than predicted upturn in the US economy next year as the combination of enhanced liquidity and interest rate cuts take affect.

But that will be too late for the Minister for Finance, Mr McCreevy, and the upcoming Budget. It is inevitable that ongoing tax receipts will be severely affected by the downturn in overall economic activity. The full extent will depend on developments over the coming weeks.