Credit crunch: melt down time

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The FT reports:

Fears that the credit crunch might be entering a traumatic new phase grew on Thursday as investors lost confidence in the insurers that guarantee payments on billions of dollars in bonds.

Shares in Ambac Financial and MBIA, the world's biggest bond insurers, fell 52 per cent and 31 per cent, respectively, as Moody's Investors' Service raised the possibility that both might lose the triple-A credit rating on which they depend.

This is scary. This market deals in credit default swaps. It's thought there are about $45 trillion of such contracts in the market - up from the Bank of International Settlements estimate of $28 trillion at the end of 2006.

UK GDP is about $2.4 trillion right now.

The mess in this market is what could really pull the whole system down. One failure of a contractual obligation here is so big that, as Martin Wolf said yesterday:

these are virtually the only businesses able to devastate entire economies.