Another week, another megabank bailout. This global crisis has been labelled with an increasing number of superlatives — extraordinary, unprecedented, colossal and unbelievable.

But the failure of global markets to take any comfort in response to the passage of the $700 billion US bank bailout last week (after failure first by a Congress fearful of voter backlash) is extremely worrying for central banks and governments running out of ammunition.

The meltdown in emerging markets (EM) on October 6 with the MSCI EM stock market index down 40 percent so far in 2008, prompted the Reserve Bank of Australia to cut interest rates a full 1 percent. Elsewhere, a full-blown UK banking crisis erupted on October 7, with Royal Bank of Scotland and HBOS, two of the largest financial institutions, falling almost 40 percent in a morning. The Icelandic Krona fell 30 percent on October 6, prompting the nationalisation of two of three largest state banks and an emergency $4 billion loan from Russia to prevent the first developed country bankruptcy seen so far in the Great Global Credit Crisis of 2008. The interlinkage between events in Iceland and the rest of the world were no more vividly illustrated than 300,000 UK internet savers in Icelandic bank Landcsbanki unable to access their money. This has prompted a GBP50 billion UK government bailout on October 8, with an additional GBP200 billion funding lifeline from the Bank of England. Make no mistake, die effective partial nationalisation of several UK high street banks

was beyond anyone's expectations just a few days ago, forget a few months ago. This really is “The Mother of Financial Crises".

Western central banks responded Wednesday with the US, ECB, UK, Sweden and Switzerland all cutting 0.5 percent. On Thursday Korea, Taiwan and Korea followed. China and India should also ease policy. We need further cuts and a massive injection of liquidity. Indeed US rates are likely to move below the 1 percent historic low seen in the aftermath of the Nasdaq bubble bursting from 1.5 percent currently. Such a move is justified given declining inflation risks. The collapse in oil prices and commodities more generally (with the exception of gold above $900 benefiting from safe haven status) is set to continue. The prospects for global recession in 2009 look extremely high so price pressures will decline as well.

Much has been written in recent years about EM decoupling -- the view that emerging markets, bolstered by massive growth in foreign exchange reserves and rapid economic growth, would remain largely unaffected by turbulence in the US. The experience of 2008 has junked this thesis. If anything there has been "reverse coupling" with EM stock markets falling even more rapidly than the US. China's stock market is off more than 60 percent from its peak. India's Sensex has also sold off by more than the US several days in the past few weeks. Brazil has plummeted while the Russian RTS index has again been shut down

several times in the past few days, falling 65 percent since May. Dramatic growth in so-called BRIC (Brazil, Russia, India, China) investment funds as global investors bet on the shift of power to the emerging markets, has meant that as one hedge-fund after another has collapsed, global banks cut back risks, and the de leveraging of global markets continues, the BRICs have been crushed by a rapid withdrawal of foreign liquidity.

An interesting observation by Paul Krugman: "One point I think is really important in understanding the crisis is that there has been a huge increase in financial globalisation just in the last tew years -- basically since 1995." He notes the rest-of-world assets in the United States have risen from around 10 percent in 1980 to over 50 percent now. Also, the US assets abroad as a percentage of non-US GDP have risen

from around 7 percent to 45 percent over the same period. While we talk a lot about the US as a debtor nation, what is really striking is the surge on both sides of the balance sheet. Krugman notes: "This has made the global financial system a lot more tightly linked, so that big economies are now experiencing the kind of contagion previously associated with emerging markets caught up in the 1997-1998 crisis. We re all Brazilians now."

Another consequence of the global meltdown and unprecedented nationalisation or intervention by the state in the US and Europe, in bailing out banks, will be massive increases in budget deficits and taxes. The US and UK budget deficit/GDP ratios will likely double to 10 percents. Also developing economies will be at risk of reduced funding from the developed coun-

tries such as the US, a warning given on a number of occasions recently by World Bank President Robert Zoellick.

Perhaps the most vulnerable country today is Pakistan whose economic strategy, unlike Bangladesh’s, is predicated on a new multi-billion dollar US package.

We all agree the financial crisis is ugly but what is the effective solution? While bank bailouts might arrest the immediate panic but will not be enough in the long run. An extended period of ultra-low global interest rates will also help. We need to see coordinated and aggressive rate cuts from the Fed, the European Central Bank, the Bank of England, and also the Chinese and Indian central banks. A 0.25 percent cut will not be enough. We need 1 percent cuts and a massive injection of liquidity. The collapse in oil prices and commodities more generally (with the exception of gold benefiting from safe haven status) means that inflation risks are much lower. The prospects for global recession in 2009 look extremely high so price pressures will decline as well.

But the longer-term solution is for China, India and the Middle East (what some have called the "CHIMES" economies -- a kind of evolution of the BRICs) to realign their efforts towards boosting domestic demand. Rate cuts will help but they should look to use their substantial foreign exchange reserves (China has $1.5 trillion and Abu Dhabi alone has $900 billion) creatively to achieve this. They should also diversify their FX reserves to stimulating growth

in EM countries, especially newly emerging and capital starved economies such as Bangladesh that offer far more compelling growth prospects than US or European economies.

l\vo weeks ago in my Daily Star Column (“A Boon for Bangladesh") I wrote that the immediate effect of the crisis would be global slowdown, which would likely see Bangladesh growth fall towards 4 percent in 2008. But the re appraisal of what defines risks in developed markets like the US and Europe, and the search for diversification into new “Frontier” Investment markets, should benefit Bangladesh in the medium-term. This is still my strategic view. The Bangladesh stock market remains resilient as a result of the low levels of foreign participation. However, I would urge investors to take a balanced approach to the afnount of risk they have in equities relative to other assets in their portfolio. If there is one lesson from this crisis, it is that we should never underestimate the unexpected happening in markets; stock prices can fall much faster than we imagine; and we should not overestimate the power of governments or central banks to support asset prices when the underlying fundamentals deteriorate. Bangladesh saw this in the 1996/97 DSEcrisis.

This time may well be different. But a cautious approach to risk is still warranted.

Ifty Islam is the managing partner of Asian Tiger Capital Partners and welcomes feedback at ifty.islam@at-capital com