Why The Greek Financial Crisis Will Be Europe’s Lehman Brothers

Lehman Brothers field for bankruptcy on September 14, 2008. Only a week earlier it looked like a shaky company that would somehow survive. The result of Lehman’s failure was that contagion to spread to other large banks and insurance companies, resulting in the use of TARP funds to bailout the banks.

Today on Bloomberg there was talk that a Greek default could be like a Lehman failure for Europe. If (or should I say “when”) that happens then major European banks will suffer huge losses on their bond portfolios, making some banks insolvent. One news story in January estimated the damage from of Eurozone defaults would cost $9 Trillion. That is in addition to the government debt that already exists in Europe which is at about 80% of GDP. So then European sovereign debt would double in a bailout to roughly 160% of GDP at which point there would be no way for the economy to escape the gravitational tug of such an excessive amount of debt. This would mean that Europe would be in a Great Depression.

How would a European default affect the world?

A European default would mean that the world would be stuck in series of rolling bear market rallies that will eventually collapse, like what happened in Japan where for years their economy kept trying to break out of a recession with bear market rallies that eventually failed. Add to that the risk that China has some need to cool off its economy which will hurt commodity exporting countries and then the whole world will be in or close to a Japan style soft depression.

About the author

Don Martin, CFP®

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