These are strange days in the financial markets.

Just how strange is evident from the discount of more than 30 per cent of HBOS's shares to Lloyds TSB's offer price.

That is a massive gap for an agreed takeover on a short timetable.

The ban on short-selling introduced to protect banks is amplifying the problem because reduced liquidity in the markets means shareholders who want to offload HBOS shares have to do so at a huge discount.

But the sheer scale of the differential between Lloyds’ offer price and HBOS’ share price indicates the market simply does not believe the deal will go ahead in its current form. The cost of insuring HBOS’ most secure debt also soared today as the spreads on its credit default swaps widened by 0.5 percentage points to 3.5 per cent, suggesting the debt markets are also concerned about the deal.

Shareholders will vote on the merger in around five weeks' time but Lloyds's institutional investors are nervous. Many investors who bought the shares did so because they liked the bank’s cautious approach to its balance sheet in contrast with HBOS's much greater reliance on the wholesale money markets. This bailout is not in the bag.

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