World economy shaky despite massive bank rescues

Even though few analysts expect another major banking group to collapse or require a bailout of similar scale, banks, particularly in Europe and the U.S., remain reluctant to lend to each other or to businesses and consumers.

The banks are spooked by recent months' events, and may be preparing for worse to come in commerce and industry. It's clear that the liquidity crunch, combined with fearful consumers' reluctance to spend, could spell doom for many businesses and feed a spiraling global economic crisis.

Though stock markets round the world have rallied for four consecutive days in the wake of the Citibank bailout, credit markets remain clogged. Hard-pressed businesses, particularly in the retail sector, urgently need working capital to see them through the tough times ahead.

"The eye of the storm happened last month but as we all know storms can last a long time," said Neil Mellor, an analyst at Bank of New York Mellon.

Though governments around the world appear to have been relatively successful in patching up their financial institutions by making unprecedented amounts of money available to them--buying stakes and guaranteeing assets--the banks have not shown much inclination to resume lending at more normal levels.

The British authorities have even warned banks that if they don't start behaving normally, regulators could step in and fully nationalize the sector, arguing that the British taxpayer did not step in to save banks seven weeks ago to get nothing in return.

Mervyn King, the governor of the Bank of England, told legislators Wednesday that the failure of the banks to lend is the "single most pressing challenge" to domestic economic policy and that if they don't break the gridlock then all options remain on the table.

"It would be a serious error to rule out measures which may prove necessary," he said.

But the banks, particularly in the U.S. and Britain, have to repair their balance sheets, which were battered in any case partly by over-exurberant lending to households.