Investment banks and hedge funds are facing billions of dollars in losses and writedowns on complex European interest rate trades, just months after problems with sub-prime mortgages and structured credit appeared to be easing.

Long term rates are almost always higher than short-term rates to compensate investors for the greater uncertainty they face because their money is tied up for a longer time. However, Jean-Claude Trichet, president of the European Central Bank’s surprise comments on June 5 that it will likely raise interest at its next meeting in July, led to a sharp inversion of the euro swaps curve, where short term rates were unusually far higher than long term ones.