Yesterday's spike in the cost of borrowing euros, dollars or sterling overnight takes the current round of credit turmoil into a new phase. There is now the risk of a real financial crisis, with banks forced to sell assets because they cannot borrow cash. Their underlying problem is losses and illiquidity in markets for asset-backed securities, but if central banks provide liquidity to compensate, and if banks and regulators move quickly to clarify the extent of losses, there is no need for panic.
In the midst of yesterday's tumult the European Central Bank felt it had to offer unlimited short-term loans to the money market, distributing €94.8bn, but while the ECB provided the banking system with extra cash it did not cut interest rates. The ECB, like the Federal Reserve and the Bank of England, clearly sees a financial problem rather than a shortage of credit in the real economy.
