US crisis leaves debt markets short of cash

by Gill Montia

Story link: US crisis leaves debt markets short of cash

The Chancellor of the Exchequer has returned from his summer holiday to join Mervyn King, the Governor of the Bank of England, and Hector Sants, chief executive of the Financial Services Authority, in considering the current collapse of confidence in international financial markets.

The crisis has been caused by lending in the sub-prime US mortgage market, where large numbers of borrowers with poor credit histories have defaulted on their mortgage payments.

The extent and whereabouts of the debts are not yet fully known and the situation has led to a sharp increased in lending rates between banks, resulting in a sudden shortage of cash in the debt markets.

As a result, some companies that have depended on short-term borrowing could be put out of business, if the shortage of available lending continues.

Economists expect the Bank of England to offer unlimited loans at base rate, should the crisis worsen.

This would be the first such intervention by the Bank on England since September 2001, when it spent £2.5 billion in the money markets.

Last week the US and the European central banks spent £135 billion in emergency lending to the markets, in efforts to stave off a global credit crisis and ensuing slump.