The lack of confidence over lending between banks turned into a tidal wave of mistrust when American investment bank, Lehman Brothers collapsed last month, becoming the first major bank to go under since the start of the credit crisis.
Almost simultaneously its demise was followed by the Bank of America’s 40-billion euro takeover of Merrill Lynch.
The next day, the US Federal Reserve stepped with a rescue package to save AIG, the country’s biggest insurer, from bankruptcy.
Defending its intervention, the government said the action saved the economy from a potentially fatal blow.
But the move failed to halt Wall Street and other stockmarkets sliding, forcing the US government to seek Congress’s approval for a 500-billion euro bail out plan for the US financial system.
The delayed adoption of the controversial measure gave the Treasury power to buy up bad debts from ailing banks in the biggest state injection in the markets since the Great Depression.
But as night surely follows day, Europe’s banking sector could not escape the fallout as fear spread over which banks had their hands in the collapsed US subprime mortgage industry.
It soon became clear that many of Europe’s big lenders had let themselves become dangerously exposed to the high risk loans market.
According to one financial expert, the crisis won’t blow over until financial institutions come clean about their investments.
Guido Ravoet, Secretary General of the European Banking Federation, says: “All banks have invested to some degree in these loans. There are some banks which have been able to write off the losses from these so-called “toxic products” but others which can’t and that’s why we now need transparency to evaluate how bad this crisis is.”
However, it seems Europe’s political and monetary authorities are now more concerned with limiting the damage of the crisis rather than investigating the cause.
Various governments have announced rescue packages of their own while the European Central Bank along with 5 others have taken unprecendented action by lowering interest rates. A massive electric shock to the health of the financial system, which is so far showing no sign of stabilising.