Financial services in Europe's two biggest centres contracted in November, data showed on Wednesday, in clear evidence that the credit crunch has dealt the industry its biggest blow in several years.
Survey data from NTC Economics showed German financial services business shrank for the first time since March 2003 and by the deepest margin in five years while UK financial services activity contracted for a second straight month.
The UK services purchasing managers' data, which were much weaker than expected, ratcheted up the pressure on the Bank of England to cut interest rates on Thursday from 5.75 percent, a decision already resting on a knife's edge.
That comes a day after the Bank of Canada surprised markets with a quarter percentage point interest rate cut to 4.25 percent, citing worries that the difficulties in financial markets will persist longer than expected.
The European Central Bank's job is now a little bit tougher given that the German data came alongside the strongest input price pressures in seven years thanks to soaring energy costs and contrasted with a strong bounce in French services activity. "On the whole these figures are consistent with an economy that is likely to be hit increasingly by not only the credit crunch per se but also the stronger euro and generally slower world demand," said Sandra Petcov, economist at Lehman Brothers.
The credit crunch showed few signs of easing on Wednesday. Sterling interbank lending rates rose for the 19th session, with one-month rates at their highest in nine years and eurozone interbank lending rates at their highest in seven years. The severity of the downturn in financial services from what started in August as a credit crunch where banks were scrambling for funds in short-term money markets now has many worried that it's only a matter of time before the broader economy suffers.
Already there is clear evidence that the UK housing market is cooling very rapidly from boom times earlier this year and the broader PMI reports suggest that it's not just financial services that are slowing across Europe.
Two German banks - IKB and SachsenLB - nearly collapsed under the strains of credit market turbulence while Britain's banks have been hit hard by a deepening global credit crunch.
A newspaper report said that the UK government has drawn up a bill to nationalise the beleaguered British bank Northern Rock if it can't find a deal with a private buyer. Prime Minister Gordon Brown said on Wednesday he preferred a private sale.
In addition to Northern Rock, bigger rivals such as Barclays and HSBC have written down billions of pounds as assets they hold have been hit. Royal Bank of Scotland, the country's second biggest bank, is expected to write down up to 2 billion pounds from a drop in asset values after the US housing crisis.
Top banks around the world, including Citigroup, Merrill Lynch and UBS have announced colossal losses and write-downs in recent weeks. Standard Chartered, which makes three-quarters of its profits in Asia where banking conditions have remained buoyant, said earlier on Wednesday that profits should jump to almost $4 billion this year.
Markets have been clamouring for the Federal Reserve, which kicked off the current round of G7 easing, to cut interest rates again on December 11. All 17 of the US primary dealers polled on Friday expected a 25 basis point cut to 4.25 percent.