There was palpable relief as the financial crisis moved into the real economy at the end of 2008. Commentators could move to the relatively familiar language that circulates around "recessions" and "depressions." The arcane minutiae of securitized debt, derivatives and toxic, three-letter acronyms (ABS, CDO, MBS, SIV, CDS, etc.) could be left behind. Familiarity, no matter how terrible, is comforting.

Markets are hoping for stability and recovery in 2009. There are reasons for caution.

Banks continue to be on life support in the intensive care unit. Further losses, more bank failures, a bleak earnings outlook and difficulties in raising equity and funding will mean the need for continued state largesse. Some financial institutions are clinging to state-led "no bank left behind" equity programs for survival. The creeping nationalization of many banking systems is probable.

Balance sheets in the financial system will continue to contract, reducing the availability of funding, and increasing the costs of funds. "Loan" and "debt" are now four-letter words.

Substantial losses in the investment portfolios of insurance companies, pension funds, asset managers and endowments will emerge. A combination of investor redemptions and unavailability of leverage will result in gradual liquidation of a significant portion of the hedge fund industry.

The sharp decrease in debt levels is driving reduction in growth and pushing most major economies into recessions - or near recession.

The financial headlines scream "deleveraging" at every turn. Companies are cutting production, reducing staff and costs, suspending investment plans, raising equity and trying to sell assets to reduce debt. Consumer spending is falling sharply as individuals increase saving and reduce debt. Falling investment earnings and lower interest rates also adversely affect the income of savers, reducing consumption. Increasing unemployment (as companies retrench), and lower investment (as global demand collapses), mean the chance for a quick recovery is receding.

Emerging markets have not "decoupled." China and India have slowed sharply. Russia, Brazil and the Gulf are also facing a slowdown as commodity prices fall sharply in the face of slower global growth. Global trade is also slowing.

The deleveraging may claim further casualties. Over 71% of debt outstanding as at 2008 was rated non-investment grade. This compares with less than 30% as at 1980 and less than 50% as at 1990.

Companies that have taken on debt to finance acquisitions will face challenges in refinancing debt. Many private-equity transactions, undertaken on aggressive terms, may be unable to service its debt commitments. It will need to be restructured or it will default.

The markets are placing considerable reliance on the ability of governments to arrest the decline and restore the global economy's health.

The central banks have flooded money markets with liquidity. The money, unsurprisingly, is not flowing into the economy. Banks are stockpiling the cash or using it to purchase government bonds. The money is needed by banks to finance around $5 to $10 trillion of assets that are returning to bank balance sheets from the off-balance "shadow banking" system. Banks also need to refinance substantial amounts of maturing debt and meet contractual payments to corporations that are drawing down credit facilities.