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To the left is a chart of the difference between interest rates charged Germany and France since late 2006. The higher the difference, the more worried investors are France will default, hence they will charge France a higher interest rate to borrow. To the right is a chart of Credit Default Swap (CDS) contract prices on major US commercial banks leading up to the 2008 financial crisis. The higher the price, the more worried investors were of US commercial bank default, hence the more willing they were to pay for CDS insurance contracts.

Notice a similarity?

If France does default, what does this mean to you, and to the causes that we talk about every day on this site?

A French default would wipe out the European financial system, and the resulting tsunami would be so high it would flow across the Atlantic ocean and render American banks no more impregnable than the Fukushima Dai'ichi compound.

The credit markets would lock up, first in Europe, then here, and we would see a repeat of the 2008 crisis on a much larger scale. The economy would tip back into a deep recession, and fresh job losses would quickly pile up. The government would lose revenues, and the deficit would explode even higher. States would lose revenues as well and be forced to fire even more workers and force unions into even more concessions. Retirement accounts would be decimated. Poverty rates would skyrocket even more than they have. More people would lose health insurance. The housing market would take yet another hit.

President Obama, in his waning days, would face a choice. Allow the US financial system to collapse, in which case the economy goes into a deep depression, making today's unemployment numbers look like boom times. Or, bail out the banks... AGAIN. You can imagine how popular he'll be, no matter how he chooses.

The Republican nominee, no matter how far out of the mainstream, incompetent, or stupid, and no matter what their personal scandals, will win, and likely come into the first term with commanding Congressional majorities. In such a scenario, even if the Republicans were to nominate Rick Santorum, Michele Bachmann, Ron Paul, or Donald Trump, they would still easily win.

It would likely be a time of great discontent. You could see disruptions in basic services, even violence or rioting in the streets.

The truly scary thing about this scenario is that there is nothing that any of us, indeed any American, can do to prevent it. The only ones who can prevent Europe from collapsing are the Europeans themselves. We can only watch-- and pray.

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Comment Preferences

  •  Tip Jar (7+ / 0-)

    "It is, it seems, politically impossible to organize expenditure on the scale necessary to prove my case -- except in war conditions."--JM Keynes, 1940

    by randomfacts on Thu Nov 10, 2011 at 04:40:15 PM PST

  •  No thank you (7+ / 0-)

    The USA did survive the Great Depression. We will survive this practically identical crisis if we do the same: nationalize the banks, create jobs for all, and tax the rich parasite class.

    A man, a plan, a canal, Panama

    by Karl Rover on Thu Nov 10, 2011 at 04:48:04 PM PST

  •  On the US political side (1+ / 0-)
    Recommended by:
    randomfacts

    Here's my guess:

    If we indeed have a huge economic crisis, and it looked like Obama would be the victim, then he might very well not run, Hillary Clinton would, and she'd win easily.

    And I am not certain that a European crisis which hurts us would mean the public would be more, rather than less, willing to go with any of the Repubs.

    •  Give it a rest -- Hillary offers (6+ / 0-)

      nothing that Obama isn't delivering.  Too bad it's mostly "Hoovernomics" with some unemployment insurance and food stamp benefits thrown in.  However, that still beats the draconian, "let them starve," offer from the GOP.

      •  Please drop the condescention (3+ / 0-)
        Recommended by:
        zinger99, Marie, beforedawn

        I was an Obama supporter in 08, wish him the best next year.

        But a set of polls last week showed the obvious - the public rejects the Repub candidates with her as the candidate - she won over any of the by a landslide.

        In other words, she might deliver something that Obama might not, in the scenario deliver - that is, a victory.

        I am not proposing a primary challenge, any insurgency. I am saying that in the hypothetical economic apocalypse scenario, if it looks like Obama would lose in a landslide, he - and perhaps we - might keep our eyes open to alternatives to the insane crowd taking over.

        •  I'm a Big Fan of President Clinton.... (0+ / 0-)

          ...but I just can't get excited about Hillary.

          And I'm convinced that President Obama is doing a much better job than H. Clinton ever could have.

          If it's H. Clinton vs. Romney, I won't get too excited about HRC.

          Romney is a real wild card.  He's easily worth over 1 billion dollars.  He wouldn't care less what his benefactors think once he left office, as he's been there, done that.  For all I know, he could propose a wealth tax, and become a "traitor" to his class.

          Learn about Centrist Economics, learn about Robert Rubin's Hamilton Project. http://www1.hamiltonproject.org/es/hamilton/hamilton_hp.htm

          by PatriciaVa on Thu Nov 10, 2011 at 06:12:19 PM PST

          [ Parent ]

          •  He's not that rich (not yet anyway). (2+ / 0-)
            Recommended by:
            Yosef 52, ozsea1

            Romney will never betray his class or clan.  

            If you're still a "Big Fan" of President Clinton, you have yet to appreciate the impact of all that neo-liberal legislation that he supported while in office and how that screwed the poor, working, and middle class Americans.

            •  President Roosevelt betrayed his Class (0+ / 0-)

              And I'm just not convinced that Romney would not.

              And this despite the fact that his firm (Bain Capital) dinged me after 3rd round interviews.

              As for President Clinton, I have tempered my enthusiasm for him over the last four years.  His regulatory policy contributed to the present mess.

              Learn about Centrist Economics, learn about Robert Rubin's Hamilton Project. http://www1.hamiltonproject.org/es/hamilton/hamilton_hp.htm

              by PatriciaVa on Thu Nov 10, 2011 at 06:33:16 PM PST

              [ Parent ]

              •  FDR had many influences (4+ / 0-)

                and experiences that led him to do the right thing when the times called for it.  There's nothing in Romney's bio that could even remotely move him to take a similar course.  For starts, FDR knew, understood and disliked the Wall St. crooks.  Romney is one of them.

              •  Not entirely... (0+ / 0-)

                he orchestrated the New Deal after getting tremendous pressure from socialist type, labor and homeless, working poor groups. He could have gone a lot further. For example, he left a system of segregation in tact in the real estate industry, setting the stage for a crisis in housing that would drag on for decades. Looking at our homeless numbers, I'd say its still here.

          •  So what did Clinton (Bill) (0+ / 0-)

            do for you? He started this tidal wave of neoliberalism, that's what he did for us.

        •  How does Obama lose in a landslide (1+ / 0-)
          Recommended by:
          ozsea1

          to one of the GOP jokers?  They played their best hand in 2010 and the public has already seen that they offer nothing but really nasty solutions.  What's Kasich polling at this point?

          Sorry if I was curt with you, but the seemingly never-ending comments here that Hillary would have been better are naive and irritating.

          •  None of the polls matter (0+ / 0-)

            if what I write here come to pass. The Republicans could nominate David Duke and he could still win. That's the point. I hate to sound like this, but almost every every domestic topic being discussed on this site-- politics, health care, poverty, taxes, education, will be completely blown away by the catastrophe. To be honest, I don't think I could live in such a world.

            "It is, it seems, politically impossible to organize expenditure on the scale necessary to prove my case -- except in war conditions."--JM Keynes, 1940

            by randomfacts on Thu Nov 10, 2011 at 06:34:59 PM PST

            [ Parent ]

            •  The American electorate can be (0+ / 0-)

              really dumb, but in a real crisis, they may not be that dumb.  Difficult to know since all they've responded to over the past six decades are faux crises.  

              •  They'll know the Republicans did this (1+ / 0-)
                Recommended by:
                ozsea1

                By now, they know the Republicans would be responsible for this debacle. They've figured out that Republicans have no interest in putting people to work or truly solving the debt crisis.

                All Democrats have to do is reinforce the message.

                --Mr. President, you have to earn my vote every day. Not take it for granted. --

                by chipoliwog on Thu Nov 10, 2011 at 09:45:56 PM PST

                [ Parent ]

          •  I of course (0+ / 0-)

            didn't say Hillary would have been better - that is nowhere in my post.

  •  There is a big difference between 2008 (4+ / 0-)
    Recommended by:
    mookins, Cliss, RWood, erush1345

    and now. In 2008 it was the banks that were defaulting. This time around, it is countries which are defaulting or on the verge of doing so.

    This crisis has the potential to be worse by a factor of ten. There is simply not enough money to bail these countries out. There is a good chance we will see a global recession lasting for another ten years.

    •  No the banks weren't defaulting (0+ / 0-)

      in 2008. It was borrowers for real estate.

      •  Hundreds of small banks also defaulted and had (2+ / 0-)
        Recommended by:
        RWood, erush1345

        assets picked up by larger banks. The larger banks and investment banks would have also defaulted if the government had not passed TARP and agreed to take up a large portion of the "troubled assets" with Freddie and Fannie.

        Companies such as AIG who sold CDS on the junk mortgages were also bailed out so they could pay the banks who had bought CDS against the shit they were selling (and holding). Bear Stearns and Lehman Brothers defaulted and assets were sold off.

        Without the massive bailouts by the Feds, all these banks would have defaulted, failing like a row of dominoes as each took out the next one.

        In Europe we are now seeing countries (instead of homeowners) starting to default on loans - the small ones like Iceland and Portugal the first to go.

        •  Iceland never defaulted. nt (1+ / 0-)
          Recommended by:
          ozsea1
          •  The country hasn't, but the banks did (0+ / 0-)

            and their debt was nationalized against the citizen's protests. The Bank of England then lent Iceland the money to pay the banks creditors. The people want the country to default on this loan because they feel it is not fair for them to have to pay for something the bankers did.

            http://www.risk.net/...
            Icelandic banks in default

            Author: Rob Davies
            Source: Risk magazine | 08 Oct 2008
            Categories: Credit Derivatives, Cash Bonds

            Topics: Landsbanki, Glitnir, International Swaps and Derivatives Association (Isda)

            The International Swaps and Derivatives Association on Wednesday confirmed that the Icelandic government’s takeover of Landsbanki on October 7 and its acquisition of a 75% stake in Glitnir Bank on September 29 constitute technical credit events.

            An Isda spokesperson told Risk a date for cash settlement auctions for credit default swaps linked to the two banks has not been set. But the move was inevitable once the Icelandic central bank intervened to shore up the country’s financial system by taking control in Glitnir and Landsbanki.

            The banks become the first European firms in default since the credit crisis began, and the first credit event in the region since Italian dairy company Parmalat defaulted in 2003.

            •  That's not exactly what happened. (3+ / 0-)
              Recommended by:
              erush1345, ozsea1, gerald 1969

              It's a really complex issue and I don't feel like going over the whole thing again, but the key issue is that while people like to say that Iceland defaulted on its debt, and use that as an argument that Greece should do the same, Iceland never defaulted on its debt.  Iceland allowed its privately held banks to go into default, and refused to insure the accounts (claiming that they had never promised to insure the accounts) (although it should be noted that the British and Dutch governments reimbursed their citizens, and that the banks are now worth enough again to fully pay their obligations).  It's an important distinction because lots of people here try to use Iceland as a reason why Greece should default, when it's about as different of a situation as you could get.  Iceland's economy is quite peculiar in general.

              •  I agree - Iceland's financial problems were (0+ / 0-)

                closely tied to the banking crisis of 2008 and it was the banks that defaulted and not the country.

                But, Iceland voted to default on the debt to foreign depositors after they nationalized the banks.

                http://www.bbc.co.uk/...

                UK 'disappointment' as Iceland rejects repayment deal

                Icelanders have rejected the latest plan to repay the UK and Netherlands some 4bn euros lost when the country's banking system collapsed in 2008.

                Partial referendum results show 58% voting no, and 42% supporting the plan.
                ...
                The issue will now be referred to an international court, the European Free Trade Association Surveillance Authority, a process which could take several years.

                Backers of a "yes" vote had argued the repayment deal was the best way to resolve the issue in terms of cost and risk to Iceland.

                The "no" camp said the Icelandic taxpayer was under no legal obligation to pay for a private bank's losses and that the deal would put a heavy burden on the nation.

                •  That's also not exactly what happened. (1+ / 0-)
                  Recommended by:
                  Claudius Bombarnac

                  First off, there was no "debt" to the British and Dutch governments as a consequence of Icesave.  Iceland never took a loan from them (well, they did later, but that's unrelated).  The British and Dutch governments bailed out their citizens and then demanded that Iceland compensate them.  In two referendums, Iceland said 'no'.  However, at the same time, Iceland has never rejected (and the Icelandic supreme court recently reaffirmed, just last week) all debt obligations of the banks themselves.

                  The key distinction is that every time, Iceland has honored any obligations incurred by the government, and held that all private parties must honor their obligations, while refusing to have the government compensate for any obligations incurred by private parties.

                  Again, the contrast must be made with Greece et al, wherein the governments have incurred debt.

    •  Let the banks sink this time. (2+ / 0-)
      Recommended by:
      chipoliwog, ozsea1

      If a European collapse stresses the banking system in the US, we should undertake a general debt foregiveness plan and bail out the depositers.  We can't keep bailing out these banks, especially if they continue the same risky practices.

  •  what you describe is true for Spain (4+ / 0-)
    Recommended by:
    randomfacts, FG, erush1345, ozsea1
    The Republican nominee, no matter how far out of the mainstream, incompetent, or stupid, and no matter what their personal scandals, will win, and likely come into the first term with commanding Congressional majorities. In such a scenario, even if the Republicans were to nominate Rick Santorum, Michele Bachmann, Ron Paul, or Donald Trump, they would still easily win.

    thats exactly whats happening in Spain. It´s a tragedy really. The Spanish government which I´d rather more like to describe as realist than socialist, found itself in quite a situation like you warn about for Obama, and the people are going to respond in quite the way you suggest here, and it´s in fact the worst they could do to their country, but they will. I do not know what can be done (there). I hope you don´t get to that point.

  •  Frightening diary, random. (4+ / 0-)
    Recommended by:
    randomfacts, Yosef 52, erush1345, ozsea1

    This is starting to look more and more like a catastrophe.  With a capital 'c'.  The thing that's so worrying is that no one seems to be in charge in the EU.  They just sit there, sitting on their hands wondering what to do next.  
    And it's been that way for months.  
    How long has the crisis been going on with Greece?  A year?  I can't remember.
    And the crisis just drags on..and on they talk about a new "summit" a new agreement, new loans, new bailouts.

    Just last week, the dire news started to surface about Italy.  Now France?

    Fasten your seat belts it's going to be a wild rest of the month.

  •  Europe is going to be just fine. (3+ / 0-)
    Recommended by:
    PrahaPartizan, gerald 1969, blueness

    They are not the droids you're looking for.

    •  These are the droids I'm looking for (1+ / 0-)
      Recommended by:
      PrahaPartizan

      because contrary to popular belief, I'm not looking for the droids with the most debt. Debt isn't even the problem. At all.

      "It is, it seems, politically impossible to organize expenditure on the scale necessary to prove my case -- except in war conditions."--JM Keynes, 1940

      by randomfacts on Thu Nov 10, 2011 at 07:16:31 PM PST

      [ Parent ]

      •  Your chart is about the cost of "Debt." (4+ / 0-)

        Your title has the word "Default."

        France's ownership of other nation's bonds is insured by CDS issued by the US banks -- which will make the French whole again.

        Italy was bailed out by China in their bond auction last night.

        I don't know what droids are keeping you up at night -- but you should ignore them and get some rest.

        •  I am aware of certain facts. (0+ / 0-)

          But these are the symptoms of the problem, in this case, not the problem itself.

          "It is, it seems, politically impossible to organize expenditure on the scale necessary to prove my case -- except in war conditions."--JM Keynes, 1940

          by randomfacts on Thu Nov 10, 2011 at 07:37:34 PM PST

          [ Parent ]

        •  Do you have a link for the China buy? (2+ / 0-)
          Recommended by:
          randomfacts, Pluto

          I know there have been talks. A Chinese buy of Italian bonds at the current 7.4% will not help Italy out of it's predicament. There's no way it can repay debt at that cost of borrowing. It will only slow and prolong it's death throes.

          If Europe eventually bails out Italy, China will do very well on the deal at those rates.

          BTW, who's going to cover the US (and German) banks that offered the CDS on European bonds if things get more out of hand and Italy and France continue to lose their bond ratings? This alone could trigger a credit tsunami. This European finacial crisis is much larger than the mortgage fiasco.

          Looks like another case of "systemic risk" only this time it is involving the 750 trillion dollar derivatives markets worldwide.

          •  How China can help Europe (3+ / 0-)
            Recommended by:
            FG, Pluto, Claudius Bombarnac

            is not buy buying Italian bonds directly, but through some indirect help. But it also needs the agreement of the ECB.

            You see, the ECB has the power theoretically to create an infinite amount of money (euros) to buy as much Italian bonds as necessary to stabilize Italy. That would certainly calm the markets. Only German, Dutch and other ECB members object to this because it would increase the amount of euros in circulation, lowering its value, hence imposing a cost on all other holders of euros.

            What China can do since it has 3.2 trillion dollar reserves, is agree to buy up (or 'sterilize') all of the money the ECB creates. To do this it would sell dollars and buy euros, as the ECB creates euros. China would then park its euros at the ECB in specialized securities that would earn interest, which the ECB transfers from the interest it earns on Italian bonds. Hence the money would be 'sterilized' and the ECB could create as much as it wants without hurting any other European country. China, meanwhile, would get to diversify its reserves and protect the stability of its export markets.

            Once again though, it would require the parties to agree to this.

            "It is, it seems, politically impossible to organize expenditure on the scale necessary to prove my case -- except in war conditions."--JM Keynes, 1940

            by randomfacts on Thu Nov 10, 2011 at 08:17:19 PM PST

            [ Parent ]

            •  Yes, China could help out Europe (1+ / 0-)
              Recommended by:
              randomfacts

              (where it already has substantial investments) but it would only do so through the IMF as far as I know (that's why I asked for a link).

              But, China wants some reform in the IMF's quota system and it's SDRs. It also wants the IMF to build an international reserve currency to replace the US$. BTW, China has sold off about 3.5% of their US$ in the last few months.

              I figure China will stand back and let the Europeans go to the very edge before they offer any financial help to get better leverage in the reforms they want. In the meantime, they will take advantage of any bargains to be had.

          •  Don't have a link for China. (4+ / 0-)

            Let's just be glad that the auction went so well, whoever the very deep pockets were.

            As for this:

            BTW, who's going to cover the US banks that offered the CDS on European bonds if things get more out of hand...

            The FDIC.

            Both Merrill Lynch and JP Morgan (the Euro bond CDS sellers) were slid under FDIC protection two weeks ago at the insistence of Bernanke.

  •  At this point France is not quite there. But if (1+ / 0-)
    Recommended by:
    PrahaPartizan

    Italy goes down, France is likely to be next.

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