The global financial outlook grows more dire by the day: The United States has been forced to shore up Wall Street, and European governments are bailing out numerous commercial banks. Even more alarmingly, the government of Iceland is presiding over a massive default by all the country’s major banks.

The country’s bank assets are more than 10 times greater than its gross domestic product, so the government clearly cannot afford a bailout. This is going to be a large default, affecting many parties. In the United Kingdom alone, 300,000 account holders face sudden loss of access to their funds, and the process for claiming deposit insurance is not entirely clear.

With European governments turning down his appeals for assistance, Iceland’s prime minister, Geir Haarde, warned last week that it was now “every country for itself.” This smacks of the financial autarchy that characterized defaulters in the financial crisis in Asia in the late 1990s. Similarly, when Argentina defaulted on its debt in 2001-02, politicians there faced enormous pressure to change the rule of law to benefit domestic property holders over foreigners, and they changed the bankruptcy law to give local debtors the upper hand. In Indonesia and Russia after the crises of 1998, local enterprises and banks took the opportunity of the confusion to grab property, then found ways to ensure that courts sided with them.

This is a natural outcome of chaotic times. Iceland’s promise to guarantee domestic depositors while reneging on guarantees to foreigners may be just a first step. Added to this are worrying signs that the credibility of US authorities is on the decline. Despite Washington’s moves to stabilize the financial system, credit and equity markets continue to drop. This pattern is reminiscent of the 1997-98 Asian crisis. There is now a risk that continued corporate and bank defaults within nations, matched by large shifts in capital flows across nations, will lead to a chaotic series of national and local defaults. If governments don’t respond with sensible, coordinated policies, there’s a risk of financial war. Here are six steps toward avoiding a situation of “each nation for itself”:

1. The world’s leading financial powers — at a minimum, the United States, the United Kingdom, France and Germany — should jointly announce national plans to require recapitalization of banks (i.e., restructuring their debt and equity mixture) so that they have sufficient capital to weather a major global recession.

2. The countries should announce a temporary blanket guarantee on all existing bank deposits and debts.

3. The monetary authorities of these countries need to lower interest rates dramatically.

4. The monetary authorities also need to remain committed to pumping liquidity into the financial system as long as credit markets and interbank lending remain weak.

5. All industrialized countries and most leading emerging markets should commit to a sizable fiscal expansion (at least 1 percent of GDP), structured to work within the local political environment, to offset the coming large decline in global demand.

6. Many families worldwide are going to have negative equity (i.e., mortgages larger than the value of their homes) due to declining home prices. The most affected nations urgently need to develop programs to provide relief for homeowners, both to offset real hardship and to prevent a vicious downward cycle in home prices.

Finally, it’s important for everyone to recognize that we are well past the days where even dramatic steps could have stopped the panic and prevented a major recession.

A successful program will not prevent recession, and we will still see many personal, corporate and perhaps even national bankruptcies. Once the genie of panic and uncertainty is unleashed, it takes years to put it back in the bottle. What we need to do is to prevent a chaotic collapse arising from incomplete policies, lack of credibility and international financial warfare.