UNITED NATIONS, Dec 1. The world economy is mired in the most severe financial crisis since the “great depression” and early responses from developed nations has failed to prevent the crisis, says a United Nations report released on Monday.

The report - World Economic and Social Situation 2009 - further states that developed countries have already entered recession and are dragging the world economy down.

In little over a year, the mid-2007 sub-prime mortgage debacle in the US has developed into a global financial crisis and started to move the global economy into a recession, the report said

Aggressive monetary policy action in the US and massive liquidity injections by the central banks of the major developed countries were unable to avert this crisis, the report said.

Inter-bank lending in most developed countries has come to a virtual standstill, and the spread between the interest rate on inter-bank loans and treasury bills has surged to the highest level in decades.

Retail businesses and industrial firms, both large and small, are finding it increasingly difficult to obtain credit as banks have become reluctant to lend, even to long-time customers.

In October 2008, the financial crisis escalated further with sharp falls on stock markets in both developed and emerging economies.

Since early October, policymakers in the developed countries have come up with a number of more credible and internationally concerted emergency plans, however, it said that compared with the earlier piecemeal approach, which had failed to prevent the crisis from spreading, the latest plans are more comprehensive and better coordinated.

The measures have reshaped the previously deregulated financial landscape; massive public funding was made available to recapitalise banks, with the government taking partial or full ownership of failed financial institutions and providing blanket guarantees on bank deposits and other financial assets in order to restore confidence in financial markets.

Will this work?

The report said that it is hard to predict, but doing nothing would almost certainly have further aggravated the downside risks and more likely than not pushed the world economy into a deeper crisis. It should be appreciated, however, that it will take time for most of these policy measures to take effect.

Consequently, it seems inevitable that the major economies will see significant economic contraction in the immediate period ahead and that recovery may not materialise any time soon, even if the bailout and stimulus packages succeed.

Moreover, the immediate fiscal costs of the emergency measures will be huge, and it is uncertain how much of these can eventually be recovered from market agents or through economic recovery.

This poses an additional macroeconomic challenge. Most developed economies entered into recession during the second half of 2008, and the economic slowdown has spread to developing countries and the economies in transition.

According to the United Nations baseline forecast, world gross product (WGP) is expected to slow to a meagre 1 per cent in 2009, a sharp deceleration from the 2.5 per cent growth estimated for 2008 and well below the more robust growth in previous years.