Baltic Dry Index plummeted below 1000

The Baltic Dry Index measuring rates for coal, iron ore, and grains, and other dry goods plummeted below 1000 yesterday, down 92pc since peaking in June.

The daily rental rates for Capesize big ships have dropped $234,000 to $7,340 in weeks, leaving operators stuck with heavy losses on long leases. Empty ships are now crowding Singapore and other global ports.

"It is extremely serious, " said Jeremy Penn, president of the Baltic Exchange. "Freight rates have never fallen this steeply before. It is telling us that world trade in raw materials has slowed dramatically. Shippers are having genuine difficulty obtaining letters of credit from banks," he said.

The shipping crisis is another blow to the City of London, which earned £1.3bn in foreign receipts from the industry last year. Maritime services employs 14,500 staff in the UK.

It is also beginning to cause strains in Greece, where the yield spread between Greek 10-year bonds and German Bunds rocketed to a post-EMU record of 123 basis points yesterday.

The upheavals on the bond markets came as Iceland was forced to raise interest rates 6 percentage points to 18pc by the IMF as a condition for its $2bn (£1.3bn) rescue package.

The draconian terms raise fears that the IMF will apply the same medicine to Hungary, Ukraine, Belarus, Serbia, as well as Pakistan and a long list of other countries that may soon need a bail-out. Critics says the Fund risks repeating errors it made in Asia's 1998 crisis when it imposed a one-size-fits-all contraction policy on the region, causing bitter anti-Western feelings and arguably making matters worse.

A deflationary strategy of this kind could prove counterproductive –or worse – if applied in enough countries simultaneously. It would defeat a key purpose of the rescues, which is to stabilise the global financial system.

The Icelandic krona traded for the first time in a week, but dealers said it was changing hands at roughly 240 to the euro compared with the rate of 152 to the euro fixed by the central bank.

Ominously for Greece, this is the first time its debt has broken its tight linkage with Italian bonds – which traded at spreads of 100 yesterday. The markets are now clearly singling out the country as the most vulnerable of the EMU members.

"This shipping slowdown is a worry for Greece, " said Chris Pryce, a director of Fitch Ratings, which downgraded the country's credit outlook last week. Fitch warned that Greece has a public debt of 92pc of GDP, leaving it no safe margin for fiscal stimulus in a downturn.

"Shipping has overtaken tourism to become the country's biggest industry. They get their finance from other countries, so I think there are going to be a lot of worried bankers in London," he said.

Shipping specialists say the Royal Bank of Scotland and HSBC provide the lion's share of loans for both the bulk goods and tanker fleets, exposing these two banks to further potential losses.

Greek shipping families control a third of the global freight market for bulk goods, with operations split between London and Pireaus.

Mr Pryce said Greek banks had expanded rapidly in the Balkan region and Turkey, with heavy exposure to Serbia and Macedonia. "They saw this as a growth region, but they may be thinking differently about it now," he said.

Michael Klawitter, a credit strategist at Dresdner Kleinwort, said the market flight from Greek bonds marked a dangerous moment for the euro. "There has been a massive widening of spreads. We are no longer having a theoretical discussion about the viability of monetary union. People are really concerned for the first time," he said.

"It is not surprising that they are looking closely at Greece. Greek banks have been buying all kinds of assets across the Balkans and they are heavily exposed to the housing market," he said.

Greece has a current account deficit of 15pc of GDP, the highest in the eurozone. Investors were willing to turn a blind eye to this during the credit boom, but they have now become wary of any country with a deficit in double digits.

Mr Klawitter said Greece is not the only country in the eurozone that is coming under the microscope. "The spreads on what was once rock-solid Austrian debt have reached 90. Investors have started to look at the numbers and they realise that cross-border loans by Austrian banks to Eastern Europe are over 80pc of GDP, and that is really worrying in this turmoil. They have seriously begun to think that one – or several – East Europe an countries are going to fail to get their act together and go the way of Iceland," he said.