Although the problems in the subprime mortgage and corporate debt markets are gaining steam slowly, they are certainly real and likely to lead to a serious economic downtown, BusinessWeek Online reports.

And with corporate loans drying up, that will mean fewer mergers and acquisitions, private equity deals and stock buybacks—which in turn will impact the markets.

In fact, the markets reacted when new spread that two private equity deals, the planned acquisitions of Chrysler and Alliance Boots, are having trouble raising capital.

There will be a “drastic re-pricing of risk, which is going to have an impact on anyone who needs to borrow money,” said Bill Larkin, fixed income portfolio manager at Cabot Money Management. The downward trend will become “self-fulfilling,” Larkin said, adding, “There is potential for continued softness for a while.”

That will mean a stark turnaround from the recent surge in M&A activity, with deals valued at more than $1.5 trillion taking place in the second quarter alone, double that of the $763.4 billion worth of deals in the second quarter of 2006.

“Housing will provide a slow-burn source of economic damage well into 2008,” Charles Dumas of Lombard Street Research wrote in a recent research note.

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