Friday, September 30, 2011

Europe can avert a Lehman

Time is running out for the Eurozone economies. They have to show quickly that they have the will and the means to tackle the sovereign debt problem emanating from Greece and embracing several other countries, including large ones like Italy. It is possible to avert a 'Lehman moment', a cataclysm in the financial markets. But this requires deep pockets to recapitalise banks and to provide finance to distressed economies, including Greece. There is no escape from doing these two things. Either this is done in an orderly way, and possibly at a lower cost, or it is done in a chaotic way, and at a higher cost.

It's no use quoting stress tests that show only 8 banks are vulnerable. Or pointing to potential losses of €300 bn on sovereign debt. Once mayhem breaks out in the markets, losses will escalate and so will the number of failing banks. The key to understanding the banking problem is not to tot up losses on sovereign debt exposure as of today but to understand their dependence on short-term US money market mutual funds. It is is this dependence that creates the potential for another Lehman moment. More in my ET column, Europe's Lehman moment.

1 comment:

Stock Tips Intraday said...

Under the current circumstances when bad debts continues to be a major concern for both the Eurozone and US as well how you see its implications both good and bad on Indian economy as a whole if the situation worsens.

And could the current turmoil on the global stage be viewed as an invitation to the commodity bubble in the near term??

And if that happens what would be its repercussions on the global economy taking India into frame as well.