Exploring the worst-case scenario

By Emily Kaiser

WASHINGTON (Reuters) - The global economy is drawing closer to a dangerous downward spiral and time may be running out for world leaders to find a way to stop it before it inflicts lasting damage.

Economists are beginning to warn of a depression-like cycle where an inability to obtain credit stalls growth, triggering more defaults and still tighter lending terms. Governments have unveiled one unprecedented move after another in the past three weeks to boost confidence and get banks back in business, yet so far nothing has been able to arrest the fall.

"There's no hyperbole that can describe it," said Kenneth Rogoff, a Harvard University professor and former chief economist of the International Monetary Fund. "It's very, very unlikely (that the world economy will fall into a depression) but we've taken five of the 10 steps we need to get there. Hopefully we won't take the other five."

The world's richest nations agreed on Friday to do whatever it takes to restore normal order to credit markets that have essentially shut down, choking off the flow of money to borrowers who normally would have no trouble obtaining loans.

In a sign of how worried companies have become about getting credit, General Electric Co (GE.N: Quote, Profile, Research) considered seeking a bank charter that would give it access to government lending channels, sources familiar with the company's thinking told Reuters last week.

Citigroup economist Steven Wieting said it was particularly worrisome that banks were still hoarding cash even after the U.S. Federal Reserve flooded markets with emergency money and lowered its benchmark interest rate by 3.75 percentage points in the span of 13 months.

Central banks elsewhere around the world have also opened up government coffers, and they banded together on Wednesday in the broadest coordinated interest rate cut on record, yet that proved insufficient to restore market confidence.

"With no desire to exaggerate, this might be considered the financial pre-conditions of a depression," Citigroup economist Steven Wieting wrote in a note to clients.  Continued...