The jump in stock markets on both sides of the Atlantic over the past two weeks, combined with the bank recapitalisations, has given hope that the worst may be over. But let’s be clear — this recession has only just begun.

All we have achieved so far is to make the banks strong enough to withstand the onslaught of what is to come. The rights issues at Lloyds Banking Group, HSBC, Royal Bank of Scotland and Barclays served to do two things. They repaired balance sheets smashed by exposure to subprime mortgages or other toxic assets and made the banks strong enough to endure the economic blitz that is starting to unfold.

The recession is now making a direct hit on the economy. We know that the government thinks it can contain at least £120 billion of bad news. That is the size of the total buffer it has insisted our big four banks need to hold in reserve to withstand the torrent of impairments to come. And that is before the banks take part in the asset protection scheme, designed to help dispose of toxic assets. This could run into hundreds of billions.

Some 120 small businesses are going bust every day and the economic consequences of this are huge — mortgage and credit-card defaults, personal bankruptcies and a collapse in consumer spending.

And there are some corporate upheavals, in the shape of big restructurings, around the corner.

These will result in debt-for-equity swaps and multi-billion-pound bank write-offs. You only have to look at the 50% fall in Boeing’s order book last year to get a feel for what’s happening. Then work back through the supply chain.

We are still only at the beginning of taking leverage out of the system and it is going to take years to unwind everything. There are some encouraging signs, such as the issuance of corporate bonds, but too many people still cling to the hope that recovery is not far off. This is going to be a long haul. The stock-market bounce of the past two weeks reflects only the fact that at a (pre-exceptional) trading level the likes of Barclays, RBS and Lloyds are on the mend, even though lots of their corporate and retail customers are heading for intensive care.

London the Enforcer

THERE appears to be a growing consensus that we need a new EU financial regulatory body. Its powers are yet to be determined but, whatever they are, it is essential that it has its headquarters in London.

When the European Central Bank was created, Germany’s Bundesbank saw how its own status would be diminished and ensured that it was based in Frankfurt. Similarly, Brussels has seen the huge economic benefits of the European Commission.

If a new European regulator, responsible for cross-border regulation, was based on the Continent it would erode London’s status as a financial centre and chip away at the powers of the Financial Services Authority. It is a threat that this country can do without and, when Gordon Brown plays centre stage this week at the G20 summit, he should start lobbying hard to ensure that our City lands the prize. London cannot afford to be marginalised in the debate over the shape of financial regulation.

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