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Fully Fledged Credit Crisis May Be Ahead: Author

The world could be heading into another fully fledged credit crisis, according to Satyait Das, the author of Extreme Money: Masters of the Universe and the Cult of Risk.

Trader at London Stock Exchange, England.
AP
Trader at London Stock Exchange, England.

An expert on risk and credit markets, Das believes that the euro zone debt crisis has taken a turn for the worse and is worried the recent deal to bailout Greece could fall apart. After Finland demanded, and got collateral against its contribution to the bail out package for Greece, others demanded the same terms.

“Hearing of the ill-advised side deal between Greece and Finland, Austria, the Netherlands and Slovakia also are now demanding collateral, arguing that their banks were less exposed to Greece than their counterparts in Germany and France entitling them to special treatment” said Das in a report sent to CNBC.com.

Given that Greece does not have the funds to offer up collateral, Das believes they would have to borrow the money. Given that the yields on Greek debt are so high, this defeats the purpose of the bailout.

“Compounding the problem is Greece's fall in gross domestic production (GDP) was worse than forecast, even before the latest austerity measures become effective,” he said.

“A disorderly unwind of the Greek debt problem cannot be ruled out."

The second problem facing financial markets, in Das' opinion, is the banking sector.

“Banks globally, especially European banks, are seen as increasingly vulnerable to European debt problems. The total exposure of the global banking system to Greece, Ireland, Portugal, Spain and Italy is over $2 trillion. French and Germany banks have very large exposures” said Das.

“If there are defaults, then these banks will need capital, most likely from their sovereigns. As they are increasingly themselves under pressure, their ability to support the banking system is unclear” said Das.

With the French banks in particular seeing heavy selling, he is also not convinced that Warren Buffett’s support for Bank of America is a good sign.

“BoA’s decision to issue $5 billion in preference shares to Warren Buffett's Berkshire Hathaway, now confirmed as the market's lender of last resort, at distressed prices was not a statement of strength but weakness. BA needs more capital in any case and Buffett is betting on both BA and if things go wrong that the US taxpayer will bail him out as they did with his investment in Goldman Sachs.”

Money markets are also showing signs of distress, according to Das.

“Banks and financial institutions are finding it increasingly difficult to raise funds. Costs have risen sharply," he said.

“Banks are increasingly following Tennessee Williams' advice for survival: 'We have to distrust each other. It is our only defence against betrayal'."

Throw in a slowdown in economic growth and Das believes trouble is on the horizon.

“The rapid and marked deterioration in economic and financial conditions means that the risk of a serious disruption is now significant," he said. “If markets seize up again, then "this time it will be different". There might just not be enough money to bail out everyone and every country that may need rescuing.

“The global economy may muddle through, but a second credit crash is now distinctly possible. But the trigger and timing is unknown,” he added.

Contact Europe: Economy

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