The fallout from the US sub-prime crisis has more than sufficiently seeped into the Australian marketplace, stretching far beyond the parameters of mortgages.

Unprecedented media coverage in both news and business reporting has highlighted a so-called credit crunch. However, according to one expert, it's germinated from this into a liquidity crisis.

Ben McCarthy, managing director and head of structured finance for international credit rating agency Fitch Ratings in Sydney, says the issue has evolved in an entirely new direction compared to where the markets were positioned two months ago.

"It's a long way past that now. It's more a liquidity crisis - really a crisis in confidence across the structured finance market rather than concern about underlying mortgage performance," he says.

According to McCarthy, the realisation that the US sub-prime losses would be larger than anyone could have anticipated startled investors, resulting in a move away from risk-geared products.

Further to this, investors are generally shying away from structured finance products across all areas of financial services, exacerbating an already dire situation.

The price of fixed income investments fall with the fall in demand. As fund managers look to sell assets to meet redemption payments, this leads to an increase in secondary market supply of those assets, which haven't previously been impacted upon, and the liquidity risk is then transferred to alternate assets.

"It's a rolling effect in terms of securities," he says. "People selling their better assets increases the supply of those assets in the market. It becomes a buyer's market and the price on all assets is affected."

While many investors have been able to weather the credit storm over the past two months, the question now being raised is how long can both banks and non-bank lenders absorb much of these costs?

There are a number of different ways of looking at the situation, according to McCarthy.

As public companies, he believes the banks need to balance the needs of their customers and their shareholders and ultimately, he says, they need to decide who will take the rise in cost of funds.

"Do they pass it to customers or to shareholders? To date, they've taken the hit themselves with the view the market will get better," he says.

McCarthy wouldn't speculate as to which of the major Australian securitisers would be hit hardest.

"The wholesale market's repricing of risk is finding its way to the retail borrower," McCarthy observes. "We've already seen some of the banks put up their low-doc rates and the non-conforming and the prime lenders dealing in low-docs are seeing it's harder to fund the riskier mortgages already. It's just a matter of when they'll pass it onto the average borrower."

Mainstream media commentary throughout this period has also inflamed debate as to whether the fallout has impacted Australian markets to the extent reported. Many argue the reportage has shifted the real focus.

"It's fair - the media have been blowing it out of proportion," McCarthy says. "Our expertise is in credit quality, and prime mortgages are as good as they've ever been so nothing has changed there. Put simply, while credit quality remains unchanged, there has been a repricing of risk. Investors now want to be paid more than they were paid previously to take the same risk."

Ultimately, anyone who relies on capital market funding is affected and depending on how they finance themselves, many groups are equipped to continue to absorb and in time offset the increased cost of funds.

McCarthy explains, "If they're in a position where they have left space in their facilities, they're in a good position. Otherwise they're required to go to the capital markets in the current environment where end pricing is uncertain."