SOME 18 months into the global credit squeeze, it is hard to form any view other than that things are getting worse. In the last 10 days the US government has nationalised two multibillion-dollar mortgage banks; allowed the fourth biggest US investment bank to go under and facilitated a $20 billion lifeline for insurance giant AIG. In tandem with this, one of the most illustrious names on Wall Street, Merrill Lynch, has entered into a hastily arranged €50 billion marriage with Bank of America in order to head off its own credit crunch related problems.
Perhaps the best that can be said of these events, and of the weekend just past in particular, is that they had to happen if there is to be any recovery. The seismic events taking place on Wall Street are in effect the US banking industry finally facing up to the losses that it has incurred as a result of the subprime lending debacle. Not until these losses have been washed through the system will banks start to routinely lend to each other again, easing the global credit crunch.
It is also possible to draw encouragement from the decision of the US Treasury and Federal Reserve not to support a rescue of 158-year-old Lehman Brothers. Attempts to sell the bank to Barclays and Bank of America failed last weekend after the US authorities refused to help underwrite potential losses. Treasury secretary Hank Paulson has won plaudits for signalling a halt to state bail-outs and sending a message that the US authorities feel the system is strong enough to absorb the bankruptcy of a bank such as Lehmans which survived two world wars and the great depression.
But it is impossible to ignore the other implication of the events of last weekend: that fear and uncertainty still permeate the global financial markets and that, when it came down to it, Wall Street baulked. Concerns about their own strength and solvency meant that none of Lehmans' peers were prepared to take on the risk that its liabilities might be larger than thought. Equally, fear and uncertainty lay behind the sale of Merrill Lynch - a deal apparently hatched in the shadows of the collapsing rescue effort for Lehmans.
It remains to be seen if last weekend amounts to some sort of a bottoming out of the crisis in the financial markets. But as of today that seems an optimistic assessment, with attention now turning to AIG and a potential catastrophic downward spiral in its assets.
The Irish banking system may have only a tangential exposure to Lehmans, but it continues to feel the full force of the global credit squeeze. The events of the last 48 hours can only intensify the pressure and whatever problems the various Irish banks face will only be exacerbated.
The Central Bank is holding to its principle of not commenting unless it is doing so on its own terms. The market is left to draw its own conclusion, but the inference is that there is no particular cause for concern. With the Government giving every appearance of being overwhelmed by the scale of economic problems facing the Exchequer, it is to be hoped that this is the correct interpretation.