The idea of a “crunch” sounds reassuringly swift. One short, sharp bite and it's done. Yet the global credit crunch is not at all like that. It is proving far from the short-lived shock that some had hoped for - and it is still far from being done.

Almost exactly a year since the crunch took hold with a vengeance last August 9, no let-up is truly in sight. The vice-like squeeze on Western economies' lifeblood of lending to households and businesses grows tighter still.

There are plenty of observers who understandably will argue that irresponsible borrowers and “credit drunks” among both individuals and companies, who have binged for years on lax lending, were overdue for a painful spell of cold turkey.

Yet the impact of the credit crunch is more akin to the lending equivalent of American Prohibition in the 1920s than of merely forcing a reckless few intoxicated by debt on to the wagon of prudence. Now, whole economies have got a bad case of the shakes as a result.

Recent developments have made it painfully clear that the flow of readily available finance will be severely curtailed for many more months, if not years.

The critical reasons why the credit drought is set to grind on are outlined compellingly in a recent report by David Miles and colleagues from Morgan Stanley.

Ominously, Professor Miles and his team also highlight how Britain is peculiarly vulnerable to the protracted financial squeeze from the credit crunch. In turn, the UK's high exposure to the resulting upheavals will have vital implications for what happens to interest rates.

More on that later, but let's begin with why the crunch is proving so prolonged. Several of the key factors were also starkly set out by the International Monetary Fund (IMF) last week in an interim update on its twice-yearly Global Financial Stability Report.

First, and crucially, the IMF underlined the real prospect of a further wave of serious losses for banks on lending in the United States as the American housing slump continues to deepen.

The IMF's analysis points to the danger of a vicious downward spiral taking hold in the US, where new losses for banks lead to still tighter lending conditions, further sapping economic growth, plunging more companies and households into financial distress, leading to more defaults on loans, still deeper bank losses and further legs downward.

Secondly, as Morgan Stanley emphasises, huge uncertainties over the scale of the eventual losses facing banks in the US and elsewhere is inducing an ultra-cautious approach, leading them to pull down the shutters on would-be borrowers and insulate themselves against exposure to the toll on rival institutions.

A third issue is that, after banks on both sides of the Atlantic overstretched themselves by lending too much against too small a foundation of capital, they are continuing to struggle to raise the extra capital they need to rebuild their financial strength.

As the IMF and Professor Miles note, the fresh capital raised by banks remains lower than the huge $400 billion-plus (£200 billion) losses they have sustained.

Yet with investors fearful over new losses, the banks' falling share prices make infusions of new equity finance both elusive and expensive. With still more turbulence ahead, institutions are left with little option but to rein in lending to safeguard their existing capital.

Nor has debt finance from the lending market between institutions become any more readily available, or any cheaper. Interbank loan rates remain elevated and markets in asset-backed securities are still effectively shut down.

Why, then, is Britain finding itself on the frontline of the continuing credit crunch?

There are several key issues: the relatively large scale of the financial hit still being shouldered by UK banks and the increased funding costs they face; the banks' greatly increased reliance since 2000 on now scarce finance raised in wholesale markets to back mortgage lending; and the greater reliance on bank finance by a heavily indebted British corporate sector.

The financial strains on Britain's banks are apparent from an estimated gap of $11.8 billion between the $43.3 billion that they have written off since last autumn and the $31.5 billion they have raised since in new equity finance.

The scale of the wholesale funding problems in the mortgage market was underlined last week by Sir James Crosby's report on causes of the home loans drought.

It found that some £40 billion of mortgage-backed securities that have financed existing lending will mature and need to be refinanced each year over the next three years simply for banks to maintain existing mortgage lending levels.

This vast £40 billion sum is the equivalent of more than a third of last year's total net mortgage lending in Britain, yet these funds are simply no longer available.

The repercussions are clear from the drastic slump of more than two thirds in the numbers of new home loans now being agreed each month.

At the same time, the credit crunch also appears to be inflicting an increasingly brutal squeeze on businesses. Bank of England figures highlighted by Capital Economics show that the amount of ready cash held by UK companies is now plummeting at a record pace even faster than that seen in the last recession - a red alert over growing financial strains.

The causes can be traced back, at least in part, to a diminished availability of bank funding. Citigroup points to data showing that the level of available borrowing facilities yet to be used by businesses fell in June at a rate not seen since 1992.

All of this argues persuasively that the credit crunch in Britain remains intense, is aggravating an already acute danger of recession and that the Bank of England must reject any case for a rise in interest rates that would amount to overkill in its fight to quell inflation.

The ferocity of the credit crunch must surely mean that the present 5 per cent level of interest rates, which might once have been regarded as relatively low, is now underpinning excessively tight financial conditions that are acting to choke off economic activity.

As Professor Miles argues, the harsh scale of the squeeze on lending conditions almost certainly means that the so-called neutral level of interest rates, where the Bank is neither applying the brakes to the economy nor putting its foot on the economic gas, has fallen markedly - perhaps some way below 5 per cent.

The Bank is already squeezing Britain's brakes hard enough. Hitting them still harder would risk turning a sharp slowdown into a crash.

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