The spread of the credit crunch to prime agency mortgages on Thursday – with warnings from Amsterdam-listed Carlyle Capital that it had defaulted on margin calls from lenders – threatens a spiral of declining prices and forced loan repayments, according to banks and investors.

Banks hurt by the subprime crisis and increasingly short of balance sheet capacity to make new loans want to cut back on lending, a problem manifesting itself everywhere from the moribund leveraged buy-out market to low-deposit home loans. But the financing difficulties hitting hedge funds and other geared investment vehicles could become self-reinforcing due to the complexities of the reverse repurchase, or repo, market used to make loans to buy bonds and credit instruments.