Opinion remains divided on the questions of how far-reaching the credit crisis will be and how long it is likely to last. The issue was a divisive one between the panellists at a debate on the credit crunch at Londons Cass Business School last week.
The panel included Jim ONeill, head of global economic research at Goldman Sachs, and Holger Schmieding, head of European economics at Bank of America. Both men say the problems facing financial markets may not prove as dramatic as some have feared.
If its well managed the credit crunch may turn out to be quite manageable, said Schmieding.
He said that what matters is not what happens in the wholesale market but whether credit is getting through to end users.
America has suffered particularly as it was hit simultaneously by a correction in its property market and an oil shock of record price peaks. ONeill said, however, that the root of the problems in the American market goes beyond the problems of the property sector.
The origin of this is a combination of the weakness in US house prices with the fact that countries are unwilling to continue to finance the growing US current account deficit.
The potential of developing markets, however, may prevent these issues from having the catastrophic effect on banks that some have predicted. While America may be suffering, the Bric countries of Brazil, Russia, India and China will offer some shelter for a struggling financial sector.
ONeill, who coined the acronym Bric, said not only can investors take advantage of growth in these regions but the increased activity of sovereign wealth funds can be viewed as reassuring, or even necessary for developed economies.
Their views met challenges from analysts who say that confidence in a quick recovery in global markets will only serve to delay the reforms needed to stave off a global financial disaster.
We are not in a meltdown but the risks are building significantly, said Gillian Tett, the capital markets editor of the Financial Times, a fellow panellist.
Ian Marsh professor of finance at Cass, said that the rapid credit growth without monitoring that we have seen in recent years has to be curtailed.
Credit risk needs to leave the banking system. Loan growth needs to be restrained and banks have to carefully check the credit histories of their loan customers, he said.
The event was organised by