By Larry Elliott: Guardian London

A trader at the New York stock exchange. The last four years have seen five key stages of the global financial crisis, with more likely to come.

From sub-prime to downgrade, there have been five stages of the most serious crisis to hit the global economy since the Great Depression.

Phase one on August 9, 2007 began with the seizure in the banking system precipitated by BNP Paribas announcing that it was ceasing activity in three hedge funds that specialised in US mortgage debt.

This was the moment it became clear that there were tens of trillions of dollars worth of dodgy derivatives swilling round which were worth a lot less than the bankers had previously imagined. Nobody knew how big the losses were or how great the exposure of individual banks actually was, so trust evaporated overnight and banks stopped doing business with each other.

It took a year for the financial crisis to come to a head but it did so on Sept 15, 2008 when the US government allowed the investment bank Lehman Brothers to go bankrupt. Up to that point, it had been assumed that governments would always step in to bail out any bank that got into serious trouble: the US had done so by finding a buyer for Bear Stearns while the UK had nationalised Northern Rock.

When Lehman Brothers went down, the notion that all banks were ‘too big to fail’ no longer held true, with the result that every bank was deemed to be risky. Within a month,

the threat of a domino effect through the global financial system forced western governments to inject vast sums of capital into their banks to prevent them from collapsing.

The banks were rescued in the nick of time, but it was too late to prevent the global economy from going into freefall. Credit flows to the private sector were choked off at the same time as consumer and business confidence collapsed. All this came after a period when high oil prices had persuaded central banks that the priority was to keep interest rates high as a bulwark against inflation rather than to cut them in anticipation of the financial crisis spreading to the real economy.

The winter of 2008-09 saw coordinated action by the newly formed G20 group of developed and developing nations in an attempt to prevent recession turning into a slump. Interest rates were cut to the bone, fiscal stimulus packages of varying sizes announced, and electronic money created through quantitative easing.

At the London G20 summit on April 2, 2009, world leaders committed themselves to a $5tr fiscal expansion, an extra $1.1tr of resources to help the International Monetary Fund and other global institutions boost jobs and growth, and to reform of the banks. From this point, when the global economy was on the turn, international cooperation started to disintegrate as individual countries pursued their own agendas.

May 9, 2010 marked the point at which the focus of concern switched from the private sector to the public sector. By the time the IMF and the European Union announced they would provide financial help to Greece, the issue was no longer the solvency of banks but the solvency of governments. Budget deficits had ballooned during the recession, mainly as a result of lower tax receipts and higher non-discretionary welfare spending, but also because of the fiscal packages announced in the winter of 2008-09.

Last Friday, the morphing of a private debt crisis into a sovereign debt crisis was complete when the rating agency, S&P, waited for Wall Street to shut up shop for the weekend before announcing that America’s debt would no longer be classed as top-notch triple A. This could hardly have come at a worse time, and not just because last week saw the biggest sell-off in stock markets since late 2008. — The Guardian, London