Your 5-Minute Wake-Up Call: The Dangers of European Debt Contagion
From the BBC program Newsnight; last week.
Host: "Let's suppose that political leaders remain dilatory or resistent, what happens?"
Dr. Robert Shapiro: "If they can not address this in a credible way, I believe within perhaps 2 or 3 weeks, we will have a meltdown in sovereign debt which will produce a meltdown across the European banking system. We're not just talking about a relatively small Belgian bank; we're talking about the largest banks in the world, the largest banks in Germany, the largest banks in France. That will spread. It will spread to the United Kingdom, in part through sovereign debt problems in Ireland. It will spread everywhere because the global financial system is so interconnected. All those banks are counterparties to every significant bank in the United States, and in Brittain, and in Japan, and around the world. This would be, in my view, more serious than the crisis of 2008."
Lord Myners (served as Britain's Financial Services Secretary to the Treasury through the 2008 bank crisis): "I wish I could giver a more cheerful complexion, but we're on the verge of a perfect storm."
Later in the video, Dr. Shapiro speaks of the dangers that may lurk within what is NOT known about bank exposures and counterparty risk:
"We do know, in the United States, our banks have relativerly little exposure to European sovereign debt. They've been getting rid of those holdings for a year. However, no one knows the state of credit default swaps held by these institutions against sovereign debt and against European banks. Nor do we know the state of credit default swaps held by British banks. Nor do we know the state of credit default swaps held by British banks. Nor are we certain of how serious the exposure of British banks is to Ireland's sovereign debt problems."
Here is my discussion of these remarks with my take on the risks underlying the Eurozone crisis.
You never forget a near-death experience, and over my years I've had quite a few.
As investors, I believe we are wise never to lose sight of just how close we came during 2008 to some seriously horrific scenarios that could have proven quite fatal to our entire financial system.
In a moment, I will ask you to invest four minutes and 22 seconds of your life, in order that you may give serious and timely consideration to the possibility that right here -- right now -- the world may be far closer than most people imagine to seeing the European debt crisis spiral completely out of control.
But first, let's take a moment to recall just how close the United States and the U.K. came to suffering similar fates such a short time ago.
A pair of near-death experiences
As former Rep. Paul Kanjorski asserted in this astonishing appearance on C-SPAN in 2009, had the U.S. Treasury not taken bold action to stem an "electronic run on the banks" that gripped U.S. money markets on the morning of Sept. 18, 2008, then we could have seen "the end of our economic system and our political system as we know it." Kanjorski added: "If [the Treasury] had not done that, their estimation was that by 2 o'clock that afternoon, $5.5 trillion would have been drawn out of the money market system of the United States, would have collapsed the entire economy of the United States, and within 24 hours the world economy would have collapsed."
I remember my jaw dropping to the floor when I first encountered that watershed admission, and I know I was not alone.
The United Kingdom faced its moment of truth a few weeks later, on Oct. 10, 2008. According to then-Financial Services Secretary to the Treasury Lord Myners, the U.K. banking system came within three hours of complete collapse, as the nation experienced its own major bank run. Talk about a trial by fire; Lord Myners had only been appointed to the post the week before!
So both the United States and Britain reportedly came within a few hours of experiencing complete meltdowns of their respective financial systems that would have triggered dire economic scenarios for the world at large. I find it humbling to recognize the underlying frailty of it all, and three years later I find little reassurance that a repeat performance has been taken off the table.
[There is much more to the discussion. Please click to the article here for the full article, and thank you in advance for reading, reccing, and retransmitting as you see fit.]