It's all about confidence. A couple of weeks ago, the Government unleashed a massive assault on the credit crunch.

The package was complex, and short on a number of important details. But the message was clear for anyone who was prepared to listen: the banking system of the United Kingdom is being backed by the national balance sheet.

That means the public can have confidence in the integrity of their banks, and that provided their business is sound, ordinary companies up and down the land are not going to be starved of the credit.

This was a big but necessary step. Back in October, an injection of tax-payers' money had not filled the funding gap that had been left by a deepening recession and the withdrawal of foreign banks from the UK lending market. More was needed and two weeks ago we were promised that the credit taps would be opened at full force. And they were.

But then the story started to get lost in translation. The Royal Bank of Scotland came out with a grisly set of results, and all of a sudden we were talking about a second bank bail-out rather than a massive increase in the availability of credit. Bank share prices went into a spin, and normally sensible people started to make the case for bank nationalisation.

Then came a string of economic data, all reasonably predictable but all very bad, so that by the end of that week the country was sunk in a kind of collective gloom. So the credit package had been more or less written off even before it had started to come into effect.

So what's the reality? The UK's public finances are in a poor shape, and will get materially worse. But as Goldman Sachs have put it, the market's negative reaction was excessive, and the UK is not about to go bust.

Our capital markets are deep enough to support the necessary increase in Government borrowing. And our flexible labour market and floating currency will make it much easier for our economy to adjust to the recession than will be the case for some of our continental neighbours.

It will take a few weeks before some of the complex details in the new arrangements can be worked out and credit starts to flow. However, the Government's intention is clear. It's jumping through all these hoops because it has no option but to do everything it can to put the banking system back onto a more stable footing. That's a prerequisite for economic recovery.

Over in the US, there are signs of life and renewed confidence in the money markets, and that's what we have to work for here.

  • Contact Steve Rankin at the CBI on 01252 360420