(By Deutsche Welle) Limited private sector exposure and massive public sector intervention means little risk of financial contagion spreading from Greece. But there is one area of uncertainty: European politics, says DW’s Spencer Kimball.
Financial contagion is normally preceded by a surprise.
Take the 2008 Wall Street meltdown as an example. The US housing market had experienced a boom. Seeking to profit from the bonanza, private financial institutions the world over purchased securities issued by the mortgage lenders Fannie Mae and Freddie Mac.
Fannie and Freddie are government-sponsored enterprises. As a consequence, investors implicitly assumed that securities issued by the two mortgage lenders were backed by Uncle Sam. But their assumption was wrong, at least initially.
Fannie and Freddie’s securities did not have the same backing as US Treasury bills and when the boom went bust, financial institutions were exposed to more risk than they had anticipated. As the crisis spread through the US and global financial systems, the federal government was ultimately forced to intervene and bail out Fannie and Freddie.
“Financial institutions had wildly underestimated the riskiness of these assets, which made for really fast and furious contagion,” Carmen Reinhart, an economist who researches financial contagion at Harvard’s Kennedy School of Government, told DW.
Frankfurt am Main — Beneath the commanding heights of the gleaming skyscrapers that house some of Europe’s most powerful banking institutions, a committed core of protesters have huddled together in a small tent village to vocalize their opposition to what many of them call “the dictatorship of the financial markets.”
Last Saturday, thousands joined the “Occupy Frankfurt” movement and took to the streets of continental Europe’s financial capital to protest the political influence of institutions such as Deutsche Bank and Commerzbank. The demonstration came just a week after 5,000 people marched through Frankfurt on October 15 as part of a worldwide day of protest that stretched from New York to Rome and beyond.
The protesters have chosen to make their statement in front of the European Central Bank (ECB), the institutional nerve center of the 17 European Union member states who share the common euro currency. The ECB plays a central role in the current response to the spiraling debt crisis that threatens to suck Europe into an economic nightmare.
Nearly two years after Greece received its first 110 billion euro ($153 billion) bailout, not only has Europe’s debt crisis not been resolved – it has drastically escalated. Ireland and Portugal have since fallen victim to the red ink and now Italy and Spain – the eurozone’s third and fourth largest economies respectively – are teetering on the brink, a development that could have catastrophic consequences not just for the euro, but for an integrated global economy that stretches from New York to Beijing.
European leaders are now openly acknowledging what was once taboo: Athens cannot honor all of its obligations, and some of its debt – perhaps as much as 50 percent or more – will have to be forgiven. This increasingly likely scenario, however, would mean major losses for major banks. Three years after the collapse of Lehman Brothers, politicians are again discussing what amounts to a bailout of the banking sector. And that has made a lot or ordinary consumers and voters very angry.