A combination of new rules and billions of dollars in government money could make the $14 trillion-plus bailout for the world’s largest banks much more palatable to the public than its counterpart in the US, where the public will still see a bailout package as a threat.
As the world economy begins to rebound from the financial crisis and a string of economic crises, the US Federal Reserve has raised interest rates on several key interest-rate-sensitive financial instruments, including mortgages, stocks and bonds.
A combination of these measures has raised expectations for an easing of policy, with many investors betting that the Fed will raise interest rates again, in September, to raise the money to pay for the government bailout of the banks.
But while a more balanced Fed stance could make a financial bailout much more appealing to the country, economists warn that it could have a negative impact on the global economy.
If the Fed raises rates again to ease the burden of the crisis on the banking sector, the result would be a further slowdown in the global recovery, said Nicholas Lardy, chief economist at the IMF in London.
A lower global growth rate and the lack of the world banking system as a stabilising force will likely push the global financial system into an even deeper crisis and drag the world further into a recession, Lardy said.
“We are already entering a phase where it’s really hard to get out of a recession,” he said.
The effects of the financial sector bailout would be felt far beyond the US.
The European Central Bank will step in to help with recapitalisation of banks in Greece and Ireland, and will also step in with the assistance of the European Union.
In the US and the UK, the government will likely raise interest payments on US Treasuries to keep the banks afloat.
The US Treasury is already borrowing money to keep up with the demand for US debt, as it looks to repay the US government for the bailout of Lehman Brothers, the biggest US financial institution.
“The Treasury will not be able to make the necessary payment in time, so the Treasury will have to borrow from the banks,” Lardy told Reuters.
“I don’t think there will be any easy way to get the banks out of the hole without a lot of extra funding.”
Lardy said the financial industry was already having a hard time getting loans for its business.
“If you look at the financial markets, they are already struggling.
The companies are having to raise money from people outside the US or elsewhere, because the market is very much in crisis mode,” he added.”
That’s the biggest problem for the banks.”
Lanksey said the economic fallout from the bailout was likely to have a far-reaching impact on global markets.
“There will be a much stronger and much more dangerous global recession and a much greater risk of contagion from the banking system,” he told Reuters in an interview.
“In the UK we are already seeing a much more serious problem of contagions in other parts of the economy and a weaker recovery overall.
There are very few countries that are immune to this, so I think that will be the case for Europe as well.”
He said the fallout from a global financial crisis would be significant, especially as the impact of the bailout on the financial system was likely not to be fully felt until the end of the year.
“Even in the case of a very severe recession, the economic damage to the financial economy is likely to be much larger than in the United States,” he wrote.
The International Monetary Fund (IMF) and the World Bank have forecast that the global economic recovery will be weak by the end to 2019, after which there is likely no further recovery, and that the impact on jobs and the global job market will be even more severe.
The IMF and the WBS have forecast the global unemployment rate to fall to 12.6 percent by 2020 from an estimated 22.2 percent in March.
The WBS also said in its latest World Economic Outlook that unemployment could remain high at 20 percent by 2025.
In its latest quarterly report, the IMF said that although the economy would recover quickly, the recession and its accompanying shock to financial markets would likely slow the recovery to a more gradual pace.
“While the recession may be short-lived, the economy will likely remain weak in 2020 and 2021 and slow further down in the coming years,” the report said.
Lardy warned that a further recession was also likely, as the world had been waiting for this to happen for some time.
“A further downturn in the economy, as occurred in the aftermath of the 2008-09 financial crisis, would be far more severe than anything we have seen before,” he argued.
“As the economy recovers, the financial risks that have been associated with a protracted recession are likely to worsen.”