Kevin Rudd is warning that the world could soon face a far bigger financial crisis than anything it has seen so far.

The Prime Minister told parliament yesterday that this grim prospect would emerge, if thetoxic debt, which he said is now “polluting” the world’s banking system, is not dealt with successfully.

This was the toughest warning the Prime Minister has given, since the global economic crisis began last September.

He was addressing Parliament, during question time.

“For the benefit of the House, it is important that we are seized by the significance of this,” Rudd said.

“That is why, in the period ahead, action on toxic assets on balance sheets is of critical importance in restoring private credit flows.

“If we do not see the restoration of private credit flows in the global economy, the challenges we have faced to date will pale into insignificance compared with those we will confront in the future,” Rudd said.

“…unless this is dealt with, we are facing the gravest of crises indeed,” he added.

Rudd estimated that the total value and potential losses of toxic US-originated credit assets now ranges between US$2.2 trillion and US$3.6 trillion.

“The impact which that in turn has on private credit flows to the real economy is huge and therefore has the potential to have a huge impact on further cuts in economic growth,” he said.

No-one, least of all Kevin Rudd himself, would claim that Australia’s present Prime Minister is a great orator.

This declaration, though, is certainly one of historic importance.

The US President, Barack Obama, is struggling to deal with these issues at their source, in the US banking system.

And as the US economist, Paul Krugman, points out, US authorities have been seizing small American banks, that it deems insolvent, and effectively nationalising them, at the rate of about two a week.

He says, too, that bigger American banks, like Citigroup and the Bank of America may soon suffer the same fate.

Even the former Federal Reserve chairman, Alan Greenspan, a traditional supporter of the free market system, has acknowledged,that significant bank nationalisations might be necessary.

The authorities intention, in each case, would be to purchase the potentially insolvent bank, clean it up, then sell it, again, to private investors.

Mr Rudd also revealed yesterday, why his government is relying primarily on cash handouts and infrastructure spending, rather than tax cuts, to stimulate the Australian economy.

He said tax cuts can be hard to reverse, when the economy is strong again, and the government needs to start chalking up surpluses, once more.