Dow Jones slides on fears credit crisis will hit takeovers

The US stock market skidded lower after new predictions of an end to the era of cheap money, and with it an end to the boom in debt-funded takeovers and in corporate share buy-backs.

For weeks, the debt markets have been awash with evidence that lenders are demanding higher interest rates, and the consequences dramatically spilled into the equity market last night. The Dow Jones industrial average plunged 226 points to 13,716, at one point sliding so fast that the New York Stock Exchange introduced trading restrictions aimed at dampening the sell-off.

Investors fear that private equity takeovers will dry up if buyers cannot finance the deals at the historically low levels of recent years. In recent days, Wall Street banks postponed the sale of $3.1bn in loans to pay for the leveraged buyout of a General Motors subsidiary, Allison Transmission, and there were also rumours that bankers for Cerberus Capital were having to sweeten the terms of $12bn in loans to recapitalise Chrysler, the car maker it has agreed to purchase.

The crisis has been simmering since March - the last time the Dow plunged this sharply - when the US sub-prime mortgage market began to collapse. Rising defaults by borrowers reminded lenders of the risks, and the effects of that are still rippling through the financial system. All sorts of lenders are demanding higher interest rates to compensate them for taking on risk. Countrywide Financial, one of the biggest sub-prime lenders, released disappointing results yesterday and said defaults were continuing to rise.

"Those that assert that this is merely an isolated sub-prime crisis should observe very closely the price and terms that lenders are willing to accept with Chrysler finance this week," warned Pimco's Bill Gross, America's most famous bond fund manager. "That more than anything may wake them, shake them, and tell them that their world has suddenly changed."

Many company share prices have been inflated by hopes of a private equity takeover, or share buy-back programmes. Earlier this week, however, the travel website Expedia said it was scrapping its share repurchase plans.