Governments eye new tools for credit crisis
When governments in Europe and the US unveiled co-ordinated bail-outs of their banking industries last October, politicians and regulators rightly believed they had narrowly avoided a collapse of confidence of the financial system.
But this week it became clear governments will have to take on even more risk from the private sector if they are to restore the flow of credit to the economy.
Citigroup’s $8bn loss for the fourth quarter offers a vivid illustration of how the government bail-outs have failed to stabilise flailing markets and a deteriorating economy that continues to undermine the value of banks’ assets.
The US government’s decision, finalised late on Thursday, to insure Bank of America against “unusually large losses” on $118bn (€89bn, £80bn) of loans on its balance sheet underscores the sheer scale of the commitments taxpayers are being forced to make to shore up confidence.
If government intervention were limited to mopping up the residual mess left over from last year, this would represent little more than a minor headache.
But the real problem facing policymakers is that, despite spending or committing hundreds of billions of dollars, the banking system is still not distributing credit to the economy. Consumers and companies are being starved of credit, raising the prospect of a continuing downward economic spiral.
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