The Russian default and the knock-on effect on banks elsewhere has raised fears of further defaults that have made lenders, especially in the wholesale markets, extremely jumpy. Credit is starting to dry up worldwide.
On Friday, Lehman Brothers, the Wall Street investment bank, was having to reassure creditors about its financial solidity after rival banks called in credit lines because of speculation about dramatic losses in the Latin American markets.
Bankers say it is a sign of things to come. Already some of the smaller American hedge funds have gone under. Lenders are worried who will be next.
Commentators talk of a flight to safety. The trouble is no-one knows quite who or what is safe anymore. People thought British banks had steered clear of Russia, only to find Barclays having to provide pounds 250m for losses in the Russian bond market.
There are tales of dealers who piled into Portuguese bonds after the emerging markets started to go sour, on the grounds that, as a prospective member of the euro, escudo bonds were safe as the proverbial houses. Now the Portuguese central bank is having to intervene in the foreign exchanges to keep the currency on target and they are nursing some painful losses.
The day before, the story was of a US Treasury futures dealer for another bulge bracket firm who had called the market wrong and was in up to his neck. This is a market where, if you hear that a bulge bracket firm is about to file for Chapter 11, you order your dealing desk to pull the plug first and only then get on the phone.
Collateral? The hedge funds had that, look where it got them. Hedges? In the rouble bond crisis, they were worthless.
Standard & Poors, the credit rating agency, said yesterday there were16 countries where it saw signs of "deteriorating credit quality". These included not only countries already showing signs of strain, such as Hong Kong and the Philippines but countries which on the surface appeared robust, including Singapore, Taiwan and, most disturbingly, the US.
Unable to decide where the surefire bets are any more, lenders are putting up the shutters and going home. "There is definitely a credit crunch going on," says credit analyst Daniel Sankey at Greenwich Natwest, the bond broking arm of National Westminster Bank. "The question is how big."
The telltale sign that credit supply is drying up is the soaring cost of wholesale credit. With investors bailing out of high-risk debt, the cost for countries and companies of refinancing has soared in some cases to prohibitive levels. That is if you can get anyone to take your paper in the first place.
New issue activity has dried up in both equity and bond markets. One bond dealer said: "We are seeing stuff here that no one will buy at any price."
The key indicator of the markets appetite for risk is the spreads, or prices quoted on high-yielding debt instruments, where swaps, futures and bonds are glowing red. Spreads have jumped as much as 4-5 per cent for sterling-denominated bonds over the last month. Sterling bonds have been hit harder than either dollar or euro bonds. Even blue-chip lenders are paying as much as half a percentage point more than they were a month ago.
The problem has been exacerbated by the explosion of the derivatives market over recent years, which has made big corporates and financial institutions far more dependent on the vagaries of global capital flows. The value of the swaps market at the end of 1997 was $30 trillion, about eight times the stock of international debt. Big investors are heavily dependent on these markets to fund trades and provide hedges.
Some say that this is purely a problem for the hedge funds and the investment banks, who deserve all they are now getting. Michael Foot, head of banking supervision at the Financial Services Authority, which in June took over the role of overseer of the UK banking system, remains sanguine.
Mergers and acquisitions activity will fall sharply in the UK and the US, he says, and there will obviously be a slowdown in new share issues. "That would be bad news for investment bankers but the link between that and any productive value-added activity is not immediately apparent."
Britain's banks are, by global standards relatively well capitalised. Clearly the average overdraft is not about to be called in, nor are we about to see a rash of foreclosures among otherwise solvent small and medium-sized companies. But the immediate impact on the City is considerable and the Square Mile remains a huge wealth generator not just for London but for the UK as a whole.
We may be some way from the nightmare scenario of Japan, where interest rates have been slashed to the bone and still people will not borrow or lend. But, say the Cassandras, things could snowball.
Michael Derks at Nomura, believes there is little room for optimism. "We now have a global credit crunch. It will intensify and make it difficult for the global economy to avoid recession."
Today the shutters go up for the hedge funds and investment banks who have been borrowing heavily - "leveraging up," to use the market terminology - to fund what subsequently proved to be high-risk trading strategies like borrowing yen to fund bets on Latin American or Russian bond markets. Then come venture capitalists and the buyout specialists like Guy Hands at Nomura, who have been milking eager bond markets for cash to fund ever more ambitious deals.
Some of those are going to find themselves squeezed on all sides. As one banker explained: "Refinancing becomes more problematic, you cannot sell the companies and you get hit by the deteriorating economic climate." Time to fasten seatbelts, one thinks.