The implosion of the so-called auction-rate securities market - amid worries that bond insurers guaranteeing much of this debt could face rating downgrades - is the latest incarnation of the credit crisis.
The market, heavily used by municipal borrowers and backed by triple-A rated guarantees from bond insurers such as Ambac and MBIA (NYSE:MBI), was until now used as a safe harbour for investors.
The interest rates on such bonds reset either weekly or monthly and a lack of interest from investors can trigger a sharp rise to compensate holders.
The market's sudden slump has pushed interest rates as high as 20 per cent for entities from the Port Authority of New York & New Jersey to a hospital.
"The auction securities market is falling apart," said David Cooke, chief financial officer at Park Nicollet Heath Services in Minneapolis.
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