HEATHER SCOFFIELD reports:

OTTAWA — The global credit crunch has now become a full-blown and rapidly deepening financial crisis that central banks are scrambling to contain, analysts say.

With the U.S. Federal Reserve taking more extraordinary measures over the weekend to mitigate the crisis and set financial institutions on a more stable footing, markets are on edge, with a wary eye on the U.S. dollar, financial stocks, and credit conditions around the world.

“It is very important for everyone to understand that we are making the transition from crisis prevention to crisis management,” said David Rosenberg, chief North American economist for Merrill Lynch.

The Bank of England also moved quickly Monday morning, offering £5-billion in three-day securities to grease the wheels of the British banking system.

Friday's bailout of Bear Stearns, through a unique combination of help from J.P. Morgan Chase and the Fed, was followed on the weekend by a sudden announcement from the Fed of more flexible lending arrangements for brokerages.

The Fed also announced an inter-meeting cut in its discount rate — not its key interest rate, but one that helps determine the price at which financial institutions can access credit.

Then, on Sunday night, J.P. Morgan Chase said it would buy Bear Stearns for the rock-bottom price of $2 (U.S.) a share.

Now, there's talk that the U.S. Fed will move on Tuesday to cut its key interest rate by a massive 100 basis points — a full percentage point.

At the same time, currency analysts are closely watching the weak U.S. dollar, and talking about the need for a co-ordinated intervention to prop up the currency.

“There is a clear loss of confidence in the market and the Fed has essentially very little left it can do,” currency analyst Camilla Sutton at Scotia Capital Markets wrote in her morning note. “It has agreed to provide liquidity and it has aggressively (and will continue to aggressively) cut the overnight rate.”

Still, she, like other analysts, feared that the panic that undermined Bear Sterns will spread to other major brokerages — a fear that was reflected in stocks such as Lehman on Monday morning.

“What we are learning first-hand is that the Fed can't solve all of the world's problems,” said Mr. Rosenberg in an analysis.

Economists are now second-guessing their assumption that a recession in the United States would be shallow and short-lived, and are now warning about a longer slump that can't simply be fixed by steep interest-rate cuts.

Indeed, Bank of Canada Governor Mark Carney said as much in a hard-hitting speech to Bay Street last week, where he put the onus on financial institutions to clean up their balance sheets.

The financial crisis leaves Mr. Carney in a strange position, however. He has indicated that he is prepared to take “novel” action to confront and contain the crisis, but the crisis has not gripped Canada nearly to the extent as it has gripped the United States and Europe.

So far, the Bank of Canada has injected liquidity when need be, and added some funding to co-ordinated central bank liquidity actions. The central bank has also stepped up its pace of cutting Canada's key interest rate.

But domestic demand is still strong in Canada, and there are few signs in the economy that would warrant the Bank of Canada following the U.S. Fed with a massive interest-rate cut. However, a widening spread between U.S. and Canadian rates could well put upward pressure on the Canadian dollar at a time when the economy can't deal well with a strengthening currency.

“The Bank of Canada is expected to take a more measured approach to the rate cycle,” writes Stewart Hall, market strategist for HSBC Canada. “While Canada may face similar stresses [as the United States], the order of magnitude is considerably different than that confronting U.S. markets.”

He expects further interest-rate cuts in Canada, but not on the same scale as in the United States.

One sign of calmer conditions in Canada is the fact that the Bank of Canada has rarely had to inject liquidity into the overnight money market for the past couple of months – unlike at the beginning of the credit crunch when it was frequently injecting up to $1-billion several times a week.

Plus, the central bank has gradually cut back on the balances it requires financial institutions to keep at the bank to settle up at the end of the day. A few months ago, the Bank of Canada required several hundred million dollars be on hand for last-minute settlements, but now the requirement is back to the standard $25-million.

Still, market players and central bankers are increasingly aware that the tentacles of the U.S. financial crisis are global, and Canada is not immune.

Canada's main casualty to date has been the $33-billion (Canadian) third-party asset-backed commercial paper market, which has been frozen since August so involved parties could negotiate a workout.