Terry Murden: Banks are not out of the woods as bears tighten their squeeze

ONE observation offered on the financial crisis last week was that there is a degree of schadenfreude among the banks. They may be sharing each other's pain, but let's not forget that this is a rough old world and one's weakness is another's opportunity.

Truth be told, not many people will feel sorry for beaten-up bankers any more than they will for troubled estate agents now desperate to sell houses after the boom-fuelled pricing of recent years, or even journalists who get the blame for all the world's ills.

But this goes deeper than giving the banks a bloody nose. While they may occasionally deserve roughing up to knock the arrogance out of them, the whole economy depends on their well-being and Scotland would be in a sorry state if the banks were to suffer any lasting damage.

Andy Hornby, chief executive of Edinburgh-based HBOS, was press-ganged – in the modern sense of the phrase – into making rare public utterances outwith the bank's twice-yearly results statements as soon as he realised how serious the crisis had become. As he admitted, the stability of the whole banking system was at risk. It doesn't come much more serious than that.

There was also an immediate response from the Financial Services Authority and the Bank of England, an encouraging sign that they had learned something from their dithering over Northern Rock.

Unfortunately, the FSA's promise to root out market abuse hardly inspired hope that anything will actually come of it. In its 10 years of existence it has done nothing to stop this sort of behaviour and no one expects it to get a result this time. As for the Bank of England, its underwhelming four-line response to Thursday's meeting with the chief executives of Britain's banks merely displayed its disdain for public opinion and did little to reassure customers, investors, employees or anyone else with a stake in the banking system. It is to be hoped that it is at least working privately on plans to restore confidence.

And so to this week. When the markets open on Tuesday there is the prospect of some uplift on the back of the Bank of England's pledges of support to maintain the required levels of liquidity. There may also be a continued rally on the Dow Jones which rose 262 points on Thursday, ending one of the most volatile weeks in US stock market history.

The coming week will see a batch of US economic indicators on home sales, durable goods orders, consumer confidence and spending, and because the markets expect only bad news from each one, anything better than terrible will be seen as positive and could help to support any uplift in the markets.

Ben Bernanke, the Federal Reserve chairman, will be keeping his fingers crossed that his latest medicine – including a three-quarters of a point cut in interest rates – will perk up the patient, and some analysts are now brave enough to start calling the bottom of the market.

But the gloomy warnings keep on coming despite the more optimistic noises emerging from across the Atlantic. The latest Merrill Lynch fund managers' survey reports "record risk aversion and record cash" and contains the raw ingredients of a classic bear squeeze. The number of respondents who believe a global recession is upon us has risen sharply and the prospect of stagflation – inflation and recession – looms large. The survey, which was taken in the days before Bear Stearns and the HBOS crisis, showed a particular aversion to financials. Unless there really is some upturn in sentiment, the next survey threatens to be gloomier still.

For now, it looks like the banks may be out of the woods, but we've had too many wrong calls from those suggesting the road to recovery is now in sight.

What's more, the pain in the UK and in Scotland may be still to come. The much-talked about recession is not yet in evidence, but is widely accepted as a given.

As we report on page one, Scotland could feel the draught later this year.

There are still too many worrying indicators to feel at all comfortable with talk of the crisis being over. As one Scottish Widows equities specialist told me, there is a feeling that even worse statistics are waiting to come through and Mervyn King, governor of the Bank of England, has told us to expect a lower standard of living.

It will only be once all the bad news is out that the markets will start pricing for the upturn. Despite the optimism of those Wall Street traders, it's unlikely we have reached that point just yet.