Painful but vital treatment needed for global markets

Financial Fallout: Comment - A financial crisis is a bit like a trip to the dentist for root canal work: frightening in prospect; uncomfortable, even acutely painful, for the duration; but in retrospect, not such an ordeal, and even good for you. What was all the fuss about?

A financial crisis is a bit like a trip to the dentist for root canal work: frightening in prospect; uncomfortable, even acutely painful, for the duration; but in retrospect, not such an ordeal, and even good for you. What was all the fuss about?

Unfortunately, right now markets are strapped into the chair and enduring the most painful of experiences. Each drop in the value of stock markets, each jolt to currency and energy markets, touches a nerve end and sends spasms through the global system.

It will pass, it always does. In the 1987 crash, the pain was largely over in one day - "Black Monday", October 19. Mind you, it was the biggest one-day fall in market history.

In comparison, the "dotcom" crash of 2000 was rather more gentle, spread over a number of months. It was bad at the time, but the real damage was contained in the "new technology" sector. Markets recovered pretty quickly.

The question most ask about the current crisis is: will this be 2008 all over again? Are we having another "Lehman moment", like the one when the investment bank went bust overnight and almost brought down the entire financial system?

There are some indicators that suggest we are: the index of volatility, the Vix, which spiked ahead of the 2008 collapse, is back on the rise again; equity markets around the world are experiencing wild gyrations in daily trading, but the direction is downward; investors are fleeing to what they regard as havens, such as the Swiss franc and gold.

But it is still too early to say we are going to experience 2008 all over again, and on some measures the signs are better now.

The collapse of Lehman Brothers was a true "black swan" event, unforeseen but of enormous consequence. At the time it was described as the financial equivalent of the September 11 terrorist attack in New York.

In contrast, the US budget drama has been rehearsed with depressing inevitability for months; the loss of "AAA" status was well-forecast, and viewed as a failure of the political rather than the financial system.

The euro-zone crisis is very serious, raising the prospect of "sub-prime sovereigns", but has also been a long time in the making. The markets will continue to hunt down the next "target" - the latest favourite is France - but it's all beginning to look a little far-fetched. Economies such as those of France, Italy and Spain do not go bust overnight, whatever S&P might say.

To put the euro-zone crisis in context, the bailouts of Greece, Ireland and Portugal cost less than the US$600 billion (Dh2.2 trillion) of liabilities left behind by Lehman in 2008.

So open wide, let's get it over with. Then we can start to deal with the economic fallout. That requires an entirely different kind of treatment - and can be much more painful.