It seems hard to believe that just three months ago, most people had never heard of “sub-prime”, let alone knew what it was. Yet the failure of thousands of low-income Americans to meet the interest payments on their sub-prime mortgages has precipitated one of the biggest crises in financial markets in recent history.

And the fear is that the worst may yet be to come.

In retrospect, the crisis was inevitable. American families on low incomes were lent money way beyond their means with interest payments that were ratcheted up after the initial “teaser” rate expired.

For Felipe Deluna, a native Mexican who moved to America when he was 19, it meant that the 1 per cent interest he was paying on his mortgage quickly became 7.7 per cent. And Mr Deluna, who earned $2,000 a month, was facing mortgage repayments of $4,500. Like thousands of other homeowners in similar circumstances, it didn’t take long before Mr Deluna ran into severe trouble and was forced into a distressed sale of his home.

The problem was that the banks who had lent him the money had packaged up the debt and sold it on to hundreds of other investors, who got stuck with the bad loans when people such as Mr Deluna could not make their repayments. Many of those funds, most famously two run by Bear Stearns, the US bank, went bust as a result of the crisis.

Making matters worse, the packages of debt, so-called collateralised debt obligations (CDOs) and collateralised loan obligations (CLOs), did not just stay in America. They were sold globally, with billions of dollars ending up in Europe’s biggest banks and CLO funds. Now several of those banks, including IKB in Germany and BNP of France, have caused widespread panic by admitting their sub-prime exposure and freezing funds.

Unfortunately, those same banks and CLO funds had been fuelling the boom in the private equity sector. So it did not take long for the fear about sub-prime to spill into the buyout world. The result has been that the big banks, such as JPMorgan, Deutsche Bank and Citigroup, who had lent billions of dollars for these highly leveraged acquisitions – such as the £11 billion deal to acquire Alliance Boots – have got stuck holding on to the debt as the CLOs, still reeling from sub-prime losses, refused to take it off their books.

The spill-over into the equity markets was also inevitable, in retrospect, given that the valuations of companies on the stock markets had been buoyed by the prospect of private equity takeover approaches. With no one lending to private equity the buyout market has dried up.

In this environment of confusion and panic selling, with rumours of hedge funds going bust and banks sitting on billions of dollars in sub-prime losses, it is not surprising that the European Central Bank intervened this week, pumping more than €150 billion (£100 billion) of cash into the banking system to ward off fears of a global credit crisis.

But the reaction has been surprising. Rather than the markets being calmer, investors have become even more spooked, fearing that the ECB and the US Federal Reserve, which followed suit, would intervene in this way only if it knew something that the rest of us didn’t.

As one City source put it yesterday: “It’s like there’s some sort of black box in the middle, some sort of nervousness that the banks have yet to come clean on what the problems are. To be honest, no one is quite sure who’s lost what.”

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