(Continued from Part One.)
The fear that some already extended banks could get pulled down in the process has already started a run on support. Harry Wilson in another article reports that Standard Chartered is understood to have withdrawn tens of billions of pounds from the eurozone inter-bank lending market in recent months and cut its overall exposure by two-thirds in the past few weeks, as it has become increasingly worried about the finances of other European banks. Barclays and HSBC are reported to be doing the same.
Just as the more solid banks withdrew lending to Lehman, Merrill Lynch and others during the run-up to the summer of 2008, uncertainty about the level of toxic sovereign debts some continental European banks are holding is gradually freezing the market again. The biggest fear is that starved of interbank lending, Spain’s banks, already facing major domestic problems, would topple â€ forcing a state-funded rescue that would drag the whole country into a bailout. Any threat of default in Spain would be devastating. Germany owns Ã¢â€šÂ¬167 billion of Spanish debt, France Ã¢â€šÂ¬131 billion and the UK Ã¢â€šÂ¬103 billion. By comparison, when Lehman went down, it had debt stock of Ã¢â€šÂ¬425 billion ($610 billion).
Developments in Athens this week suggest the can has successfully been kicked down the road as far as 2012, maybe 2013. In the long run, the debt will have to be rescheduled and in the meantime, there will be casualties — those debts will be shared one way or another by the rest of Europe. As with the banking crisis of 2008, the taxpayer will foot the bill, depressing consumer demand for years to come.
Does that matter in Oklahoma or Osaka?
Yes. In the US, as the game of chicken in Congress continues, the markets will react far more strongly to the raising of debt ceilings as early August approaches, following the sovereign debt problems in Europe more than they would otherwise have done. If entire countries can fail, how will bond markets view the potential bankruptcy of states?
For Asia, sovereign debt levels in Japan are as high as, if not higher than, many European countries. For other Asian countries, Europe is their biggest export market. A Europe doomed to fund massive peripheral state debts through the socialization of those costs will not grow and prosper as Asian exporters would like, or indeed, need for their own health. So as with Lehman, when the failure of one firm was in part a failure of all, here the failure of one country could become the failure of many more and the consequences will be felt by us all for years to come.