This is the first truly global financial crisis as no market in the world has been spared. The credit crisis has worsened when the global economy is weakening and the recovery may take longer By Shivshanker Verma

Financial markets across the globe are now facing conditions not seen in a very long time. Equity prices have fallen sharply across markets, with major US indices crashing over 7 per cent each for the first three days of this week. 

European stocks have not fared any better, especially in the UK where the housing bubble was even bigger than in the US. Asian markets have not been spared either, with most indices touching their lowest levels in the last three years.

The worst hit is Russia, where stock prices crashed over 17 per cent on Tuesday and a further 4 per cent on Wednesday before trading was suspended (See: Wall Street crisis spreads to Russia; stock markets in freefall)

Bond markets have seized up with transactions falling sharply as banks are scared of lending to one another. Credit spread, the difference between benchmark yields and the corresponding market yields, continue to widen. Investors are rushing to the safety of government bonds, pushing down yields to their lowest in recent memory.

In fact, 3-month US treasury yield is at its lowest since the Second World War while the LIBOR, the benchmark lending rate between banks, is at its highest in nearly a decade. Credit default swap premium on emerging market debt has soared in recent days, especially for riskier countries like Argentina and Venezuela.

Most emerging market currencies, including the rupee, are under pressure though central banks are intervening actively to support the currencies. Central banks continue to pump liquidity to calm markets, with Russia offering three of its top banks as much as $40 billion in additional credit support.

Job losses because of the bank failures and restructuring are rising by the day. Estimates suggest that nearly 200,000 financial jobs will vanish on Wall Street this year, while London will lose half as many. The numbers would rise if job losses in sectors that support financial services are added. Such high job losses can severely affect the economic fortunes of both cities which are heavily dependent on financial services industry for high paying jobs. Even in India, job losses in the financial services, BPO and IT sectors because of this crisis is estimated to touch 25,000.

Despite the government bailouts and liquidity support, fear refuses to subside in the credit market. As every large financial company is exposed to more or less the same kind of risks, all of them are considered vulnerable. London bank Lloyds TSB is taking over troubled home loan lender HBOS while American savings bank Washington Mutual is seeking possible buyers. Morgan Stanley, which surprised the market with strong quarterly results, is said to be talking to commercial bank Wachovia for a possible merger (See: Morgan Stanley, WaMu, seek mergers).

Even Goldman Sachs, the least troubled of big Wall Street firms, is said to be hunting for partners. Stock prices of both Goldman and Morgan have tumbled in recent days though their balance sheets are far stronger than other banks which failed.

For the global economy, the deepening of the credit crisis has come at the worst possible time. The euro zone and Japan are already on the brink of recession. Though the US economy has been resilient so far, it is likely that GDP growth in the second half of this year will be much weaker. Growth in China and India this year and the next will be much lower than recent years, while other larger emerging economies will fare even worse.

If commodity prices decline further, exporting countries that have been spending heavily on infrastructure and capital investments will scale back. The building boom in the Middle East and elsewhere has supported global economic growth in recent quarters, when demand growth was slowing down in other parts of the world.  That will pull down aggregate global demand and lead to lower growth.

Lower export earnings will also leave these commodity exporting countries with less capital to invest abroad. The money would have come handy to avoid more bankruptcies. Though the US government has so far bailed out large institutions which are deemed too big to fail, it is doubtful if such actions are sustainable.

It is no secret that the US government has one of the most stretched balance sheets among developed countries and there is a limit to additional pressure it can bear, especially when the economy is weak. The US Fed has pushed the envelope of its role substantially and, as some say, has become a hedge fund or a distressed assets fund. It is unlikely that Bernanke will be willing to take direct control of much of the US financial system.

So, if more banks get into trouble, they will not have many places or saviours to turn to. Given this scenario, it is hardly surprising that fear rules financial markets now.

(Also see: Financial hurricane sweeps)