It is like an aching tooth. Action – going to the dentist – promises immediate pain. Delay – waiting for an abscess – promises deferred agony. Institutions in the credit markets, through their failure to come clean on losses due to the current turmoil, are taking the latter option and risk making the squeeze more painful than it need be.

Despite a cumulative 75 basis point cut in US interest rates, several factors have thwarted a credit recovery. First, subprime mortgage collateral, and far more important, the outlook for a wide range of US loan collateral, has deteriorated further. That has hurt the value and trading liquidity of instruments backed by such loans. From mid-September there was a sharp second leg down in indices tracking subprime mortgage bonds; the amount of asset-backed commercial paper continues to decline; and interbank lending rates remain unusually high.