SYSTEMIC IS a big word and "systemic meltdown" a truly frightening prospect for banking interests and the public alike.
That the phrase should be used by International Monetary Fund managing director Dominique Strauss-Kahn in a warning to G7 leaders graphically brings home the consequences of failure to resolve the financial crisis. The general principles set out in Washington, followed by more concrete actions agreed between euro zone leaders on Sunday, yesterday saw similar approaches to bank guarantees and recapitalisation by governments in major European capitals. At last the crisis is being tackled with the common instruments needed to prevent such a meltdown.
It is fitting that these instruments should be defined at global as well as regional and national levels. The extent of economic interdependence forged by globalisation is most dramatically revealed in the world of international finance. European complacency that superior regulation and differing models of capitalism limited exposure was swept aside, driving the issue straight on to the agenda of the Bretton Woods institutions set up after the end of the second World War. These structures must now be recast, as British prime minister Gordon Brown said yesterday; and that must take full account of transformed international economic relationships - notably the rise of Asian powers.
As this restructuring takes place, quite new priorities and objectives are being laid down. This is highlighted by the abrupt shift towards public bank recapitalisation throughout the capitalist economies - effectively nationalisation - whether on a temporary or partial basis or as a longer-term trend. Only governments can provide these guarantees, and they are rapidly learning that they need to drive hard bargains with banks after the excess and reckless lending that drove this credit bubble to explosion and meltdown over the last few weeks.
Yesterday's stock market rallies indicated some confidence may be returning and that "the peak of the crisis is perhaps behind us", as Mr Strauss-Kahn put it. But US markets were closed and it is still not clear whether enough has been done to head off a further collapse of fundamental credit mechanisms in the face of deeper exposure to bank indebtedness. At the European level, common instruments are certainly a step forward. The rolling announcements from Berlin, Paris, Rome, Vienna and Lisbon yesterday about public equity stakes and guarantees in banks were not uniform, but drew on a common toolkit of measures and a template from the UK example. But it remains very much an open question whether the huge experiment of creating a common currency without fiscal solidarity can survive this deep market shock.
Ireland's approach remains distinctive in its 100 per cent guarantees to the banks. The Government insists this will be sufficient and that equity involvement is not required. It would certainly be costly on top of today's budgetary borrowing requirements. There is an urgent need to establish the true scale of bank debt.