Last year it was banks; this year it is countries. The economic crisis, which seemed to have eased off in late 2009, is again in full swing as the threat of sovereign default looms.

Europe's leaders are struggling to avert the biggest financial disaster in the euro's 11-year history. Last week all eyes were on Greece. But bond markets are worried about the capacity of Spain, Ireland and Portugal to repay their debts, forcing these countries to increase taxes and cut spending, even as they remain mired in recession.

Europe's troubles have given investors good reason to worry; but they are not the only cause for concern. Policy changes around the world have also spooked investors.

China's government began to rein in its lending binge last month, worried about accelerating inflation and asset bubbles. India's central bank has raised reserve requirements and Brazil's fiscal stimulus is being phased out.

The rich world's big central banks are gradually unwinding the emergency liquidity facilities. "Quantitative easing," -- printing money to buy longer-dated securities -- is coming to an end, or at least being put on hold.

All this has knocked asset prices. Stock markets are down sharply, commodity prices have tumbled and volatility is up. The MSCI World Index of global share prices has fallen by almost 10 per cent from its peak on Jan. 14.

Optimism about a "V"-shaped recovery is being replaced with pessimism about a double-dip recession, as fears grow that policy-makers will be forced, or will mistakenly choose, to remove monetary and fiscal props too soon.

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Three factors will determine whether such fears are justified. The first is the strength of the recovery -- whether it is self-sustaining or still propped up by government stimulus.

The second is the scale of the sovereign-debt problems -- whether Greece is a basket-case all of its own, or investors lose confidence in other heavily indebted governments.

The third is the deftness with which the world's central bankers and finance ministers design and co-ordinate the Clip on hair extensions, withdrawal of policy stimulus.

The picture on global growth increasingly is split. Big emerging economies are in the best shape, with strong growth in domestic demand and scant spare capacity. Countries such as India and Brazil have largely put the crisis behind them.

Given the scale of its government-directed lending binge, China's economy is vulnerable to a sudden clampdown by bureaucrats. But for all the markets' worries, there are few signs that it will tighten too much too fast. A slowing is possible, but a serious stumble seems unlikely.

Not so in the rich world, where there are still few signs of strong private-demand growth. America's latest, buoyant, GDP figures are misleading. Output grew at an annualized rate of 5.7 per cent in the fourth quarter of 2009 mainly because firms were rebuilding their stocks.

With the economy still shedding jobs (albeit at a lower rate), share prices falling, the housing market still wobbly and household debt shrinking, consumer spending is likely to remain subdued. Nor, with plenty of capacity sitting idle, are firms likely to go on an investment binge.

In Europe and Japan the situation is far grimmer. Though exports are recovering, Japan has slipped back into deflation. In the euro zone, recovery was faltering long be
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