Eurozone may be breaking up — report
This just in from The Guardian:
Fears that Europe’s sovereign debt crisis was spiralling out of control have intensified as political chaos in Athens and Rome, and looming recession, created panic on world markets.
Reports emerging from Brussels said that Germany and France had begun preliminary talks on a break-up of the eurozone, amid fears that Italy will be too big to rescue.
Global depression ahead? The Telegraph:
If the euro is unsustainable in its current form, would it not be better just to get the whole thing over with and let distressed members peel off? It’s a seductive argument, but regrettably also a wrong-headed one. It’s not for nothing that the Americans and the Chinese are almost as terrified as the Europeans at the prospect of a messy end to the single currency.
A eurozone implosion would amount to the biggest bankruptcy in history. There could be no benign outcome to such an event. To reapply to the eurozone what Larry Summers, the former US Treasury secretary, said about the prospect of an American debt default, it would be “like Lehman’s on steroids”. Banking systems would collapse, credit would dry up, and world trade would go into freefall. The consequences would be felt everywhere, including in the US and China.
As painful as a Greek default would be, the world economy faces a much graver threat if investors abandon Italian debt and the cost of borrowing for the Italian government becomes prohibitive. Italy is the world’s fourth largest borrower after the United States, Japan and Germany. Indeed, it owes more than the other troubled countries on the periphery of Europe — Greece, Ireland, Portugal, and Spain — put together.
UPDATE: More from the Guardian:
US officials keep saying that US banks have little “direct” exposure to Italy. But US institutions have been snapping up credit default swaps (CDSs), insurance against credit losses. The value of guarantees provided by US lenders on government, bank and corporate debt in troubled eurozone countries rose by $80.7bn to $518bn in the first half of this year, according to the Bank of International Settlements. One, admittedly small, firm – MF Global – has already gone belly-up in the US thanks to indirect bets on Europe. If Italy goes down in a disorderly default, it will make the Lehman Brothers collapse feel like a Roman holiday.
Ron Paul said in the debate tonight that the US is going to end up having to bail out Europe. If so, it’ll be bailing out American banks — the same banks that Congress allowed to continue trading in credit-default swaps without regulation. If this happens, Congress and the financial elites will wish for the halcyon days of Occupy Wall Street.
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