KEY POINTS:
American Federal Reserve chairman Ben Bernanke could be forced to cut US mortgage rates within days if Wall St cannot contain the fallout from the lending crisis.
Deal-makers around the world are pinning their hopes on a swift resolution to the credit crunch, which has put billions of dollars worth of takeovers on hold, as banks hit by sub-prime mortgage losses shy away from risky new lending.
The Dow Jones shot up 233 points on Friday, after Bernanke cut the "discount rate" at which the Fed lends to banks by half a percentage point, in an emergency intervention to soothe the frayed nerves on Wall St.
But consumer confidence has plunged as the value of Americans' homes and share portfolios slides. There are mounting fears that a rate cut will follow.
"If this doesn't work, clearly Bernanke will have to move on to the next step," said Paul Ashworth, US economist at Capital Economics.
If there was no let-up in the liquidity squeeze that has left banks unwilling to lend, the Federal Reserve Board would have to administer a rate cut, "probably within a matter of days".
The Fed is not scheduled to meet until next month. But it said last week it was "prepared to act as needed to mitigate the adverse effects on the economy arising from the disruptions in financial markets".
Economists at Goldman Sachs, who had predicted that rates would stay on hold into the New Year, are now expecting two quarter-point cuts by December, as the sell-off in financial markets takes its toll on economic growth.
Graham Turner, of GFC Economics in Britain, said the effect of the sub-prime crisis would be felt well beyond Wall St as tighter lending conditions hit US consumers and businesses.
Among deals in jeopardy is the proposed £10.4 billion ($30 billion) takeover of Sainsbury - Delta Two, the fund backed by the Qatari Government, is having to renegotiate with banks that have pledged loans worth £6 billion.
There has also been speculation over Akzo Nobel's £8 billion acquisition of ICI.
Private equity firms are sitting on their hands, and auctions such as MWB's sale of its Malmaison and Hotel du Vin chains look increasingly vulnerable.
Analysts also expect the flotation of Virgin Radio by parent Scottish Media Group to be postponed.
- Observer
