Defaulting banks - where will it stop?

[Jan Klimkowski]

I'm perfectly relaxed about DPF continuing its intelligent discussion of the Protocols, but I'd be even happier if it was split off into a new dedicated thread.

Meanwhile, in terms of the global financial meltdown, imo there is now no Plan B.

The world's governments have turned over their last card - the one they hope is the Ace in the Hole. However, if this is a solvency problem rather a liquidity problem - which is my belief - then these "guarantees" of interbank lending and the recapitalizations of busted bank balance sheets will sooner or later fail.

Institutions will default.

And because those institutions are now irreversibly entwined with national taxpayers, indeed with the economies of sovereign states, if and when an institution fails, then countries will start failing, or defaulting too.

The politicians' "ace" in the hole will be revealed as a two of diamonds, and will be beaten by the derivatives' ponzi scheme Ace of Spades. An unimaginable black hole into which all our "chips" will be raked by the madly grinning house croupier, whilst dinner-suited bouncers frogmarch us into the night.

Ticker Forum's Karl Denninger is musing along similar lines:

Don't Be So Sure This Will Work

Last night Trichet and other policymakers in Europe basically forced Bernanke's hand, initiating 100% guarantees of interbank lending.

This forced Bernanke to follow suit early this morning, lest the US markets and US credit system implode into a smoking hole instantly.

This was not a position Bernanke was willing to take on his own, or he would have. But when the rest of the world has done it, you literally have no choice, unless you intend to be turned into an instantaneous credit island - an event that the United States would literally not survive.

So the die was cast and Paulson and Bernanke's refusal to endorse this step in the G7 meeting Friday was literally rammed down their throat.

Now, however, we have a new problem.

You see, if there are defaults, they now flow straight through to sovereign balance sheets. The IMF is now stating that there are three nations that are insolvent now, and there will be more. You can bet on it.

Amazingly, The United States is not anywhere in the worst shape here. While we certainly have our problems those over in Europe are much greater, but they're also distributed - not every nation over there is in an equal amount of trouble.

With no common taxing authority the EU has a horrifying problem if the defaults start to cascade, as allocating the losses will be nearly impossible to do with any sort of fairness. The political and monetary unrest that is likely to come from this will be considerable, and at this point I suspect that the "common currency" may fail outright - a disastrous outcome and one that could threaten geopolitical stability in the region.

http://market-ticker.denninger.net/