Expect A Global Recession No Matters What Happens In The Euro Zone

EconMatters's picture

By EconMatters

After MF Global went bust, most people believe it was an extreme "spectacular recklessness" under Jon Corzine, and that the U.S. banks should have only "moderate" European Exposure.  However, banking stocks have been under pressure with increasing investors worries. 


Jefferies Group, for example, eventually disclosed detail position it held on European debt earlier this month after its shares plunged more than 20%.  But other banks have not followed suit asBloombergnotes that since it is not required by the U.S. regulation,

"Firms including Goldman Sachs and JPMorgan don't provide a full picture of potential losses and gains in the event of a European default, giving only net numbers or excluding some derivatives altogether." 

U.S. stocks took a beating after Fitch Ratings said on Wed. Nov. 16 that Europe’s debt crisis may pose a “serious risk” to U.S. banks, driving investors to safer bets such as U.S. Treasurys.  Fitch also notes that although U.S. banks have been reducing their direct exposure for well over a year, but they haven't clearly disclosed the extent of their holdings of European sovereign debt or their trading positions with European counterparties.


There are clues to somewhat quantify the potential exposure on a global basis and of the U.S. banks.


Reuters cited a report by the IIF that European banks hold some $3.5 trillion of euro-zone sovereign bonds and U.S. banks have significant direct exposure to their European peers.  U.S. banks had about $180.9 billion of debt from GIIPS on their books at the end of June.  Guarantees and credit derivatives added another $586.6 billion, bringing the total to $767.5 billion based on Bank for International Settlements data.  But the exposure does not stop there,

" There is a secondary level of exposure that is potentially more worrying -- through international banks lending to each other. Here the greatest risk stems fromItalyandFrance. International bank claims on Italy total $939 billion, and French banks account for well over one-third of that, BIS data show... If Italian debt slumps even further, causing deeper losses for French banks, international banks could stop lending to France. The losses would ripple through the whole global financial system."

Chart Source: NYT, Oct. 23, 2011, (full report here, interactive charts here)


These figures and the fallout from MF Global are enough to put the U.S. regulators and APEC finance ministers on Euro Zone DEFCON 3 alert asReutersreported

"While the Treasury has been at pains to say that direct U.S. bank exposure to European countries now receiving bailout aid -- Greece, Ireland and Portugal -- is moderate, once the debt of Italy and Spain, plus credit default swaps, and U.S. bank indirect exposure through European banks are added, the potential sum could exceed $4 trillion." 

"APEC finance ministers agreed to shore up their economies to protect against any damage and underpin growth."

These accounts suggest that the hit that U.S. banks could take from the European sovereign default could be somewhere from $800 billion up to $4 trillion.  However, the greater risk is with some smaller iBanks, similar to MF Global, that have not thoroughly gone through and learned the lessons from the 2008 financial crisis, rather than with the top players like Goldman or JPM.


The post mortem examination by FT Alphaville described "an overnight repo black swan" of MF Global's complex "repo-to-maturity” laddered trades with a doomed steroid-charged 40-to-1 leverage.  One reckless speculation could easily lead to a total system meltdown as Bear Stern, Lehman Brothers, et al have taught us.


Meanwhile, this Euro sovereign debt crisis, even if contained and/or resolved in an orderly and timely manner, would most likely bring widespread austerity programs to almost all developed economies, including the U.S. either by the Super Committee or by the automatic spending cut, which would almost guarantee a global economic slowdown, if not an outright recession.


This is probably part of the reason that the Federal Reserve is going to conduct a fourth round of stress tests in coming weeks to determine if U.S. banks can withstand a recession.  So unfortunately, it looks like even if the U.S. and emerging economies could manage to keep the world from a recession, the European sovereign debt crisis and the aftermath would most likely finish the job.


Further Reading:

Infographic: Social Media and Holiday Home Security

Recession Drives Up Poverty in America's Suburbs

Laissez-faire: The Best Fed Policy Is To Stand Pat

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txsilverbug's picture

go go gadget PRINTING MACHINE!

cdskiller's picture

THIS KIND OF CRAP HAS TO END! It's hard to swallow, when you make a living as a trader, but conditions on the ground have changed and we cannot, CANNOT deal with this kind of secrecy anymore. We need transparency in all markets for all participants! Get it? No more of this not knowing who has how much exposure with this or that counterparty leading to the unexaminable threat of contagion if money isn't stolen to pay off gambling debts. Transparency will hurt a lot of people, including a lot people who love zerohedge. It'll mean the death of a number of markets that only work in the dark. But it will be good for the future of the whole world. Without it, kiss it all goodbye. The crooks will destroy it all and laugh.

PulauHantu29's picture

Fed is ready to print at Hyperspeed:


Given the ECB’s reluctance to act, I suspect that the Fed will spearhead the formation of a Global Liquidity Facility (GLF) to avert a global financial meltdown. Fed Chairman Ben Bernanke demonstrated that he is a master at putting together such emergency measures back in 2008. In effect, it would act as the world’s central bank. Mr. Bernanke is clearly very worried about the prospect that the European sovereign debt crisis is a contagion that could spread to the US, as evidenced by his bizarre town hall meeting with troops returning from Iraq on November 10. The GLF would receive deposits from the Fed and other participating central banks, including the ECB. The funds would be used to buy the bonds of debt-challenged governments that would be required to accept strict supervision of their fiscal and regulatory policies by the IMF.

Read more: http://www.businessinsider.com/economists-ben-bernanke-is-going-to-bail-out-europe-2011-11#ixzz1eNpDsp2R Watch Oil hit $250....Gold $10,000 and Food prices double.
Sudden Debt's picture

And X used to mark the treasure... NO GOLD THERE I GUESS!


merchantratereview's picture

Recession?? Vacant retail and commercial all around! Home values underwater.


This is a DEPRESSION NOW!!!!!!!!!!!!!!!!!!!!!!!!!!

imsaul0968's picture


For those of you who invest in an IRA or for long term goals, theres a better approach than buy,hold,hope. Stocks follow the economy so analyzing the economy, specifically the factors that are "leading indicators" and having exposure to equities only when the economy is headed in the right direction and avoiding equities in favor of safe haven baskets is a much more logical approach. And missing the major drawdowns is the only way to help ensure meeting your goals.  If you are interested in investing in a portfolio that tactically invests in equity and safe haven baskets via ETF's automatically, please email me at:


and I'll add you to the weekly market commentary & portfolio update distribution list.  Its free to add you and you can follow along our model and our views.  We have been RISK-OFF since 6/30 so have missed all this wicked volatility. Currently invested in short duration treasury baskets as flight to safety drives interest in our debt. 


boiltherich's picture

I estimate I have seen at least 175 headlines since Friday telling us we should expect a new recession when from my perspective we still have never gotten out of the last one.  And I see some prognosticators predicting dire future recessions no matter what at this point, when the truth is by any realistic definition we are already in a depression.  That though is a word that has been banished entirely from the financial dictionary never to be used again.  I think it is just a matter of days till we read a headline saying we are in the worst recession since the Crash of '29 and the Great Recession. 

If you are Spanish, Irish, Greek, one of about 70 million Americans you are already in a depression.  Maybe this is why it took them so long to get out of the last one, because just as now they refuse to admit it is a depression and thus cannot fix it.

AndrewCostello's picture

You are right.  We are spending billions of dollars every day in borrowed money to stave off a little bit of pain - and it is making the problem almost exponentially worse.


We need to take our medicine now, and end the fear.  Revalue gold to $25,000 an ounce and pay the debts.




pineyard's picture

And WHAT HIT ..is the AUTHOR ..talking about ?


and they may have to REPAY .. that DEBT ... THAT IS WHAT THIS " HIT " is About ....


ebworthen's picture

Massive global income disparities that were engineered by politicians, bankers, and other greedy nihilists.

Two choices:  debt jubilee for the masses and jail for the malfeasant, or global collapse and war.

pineyard's picture

And by the way ... it is the USA BANKS who OWE  approximately                                                             2. 34 TRILLION USD to the European Banks .. and NOT the other way around .

But ..OK.. as the USA apparantly PREPARES ..to RUN AWAY from that DEBT ... it would ofc   HURT the Foundation for this CAPITAL .. THE COMMON PEOPLE OF EUROPES SAVINGS quite a lot

I dont think Americans will be WELLCOME in EUROPE ...after THAT

Georgesblog's picture

The banks are in too deep to back out. They have to keep pushing paper, or be devoured. The ground is crumbling behind them.


pineyard's picture

Take a look at THIS ..USA "FAMILY BUDGET "

Created by removing 8 ZEROS from the USA BUDGET :






Annual household income (income tax):

+ 21,700

Family expenses (federal budget):

+ 38,200

New credit card debt (new debt):

+ 16,500

Past credit card debt (federal debt):

+ 142,710

Budget cuts already made:

- 385

Budget reduction targets of the Supercommittee (for one year): - 1,500


Now  tell me WHO ..is in REAL TROUBLE ... in this World ?



JustObserving's picture

You forgot the unfunded liabilities which are the biggest item:

US unfunded liabilities  +1,164,910

And unfunded liabilities grow at 65,455 a year


Mediocritas's picture

Nice chart from the NYT there. Be even better if it showed China as well and weighted arrows by imbalances per capita.

masterinchancery's picture

Will be a global recession? Where you been--It's here, regardless of how many fraudulent statistics various government issues to the sheeple.

Dingleberry's picture

B of A is (once again) 60 cents away from oblivion.  When they go, it all goes.  Don't you find it funny how the stock seems to have a put at 5 bucks?

falak pema's picture

there is a big hitter who says he is going to buy Bof A big time....

Here's Bruce Berkowtiz's Big Bullish Presentation On Bank of America

Read more: http://www.businessinsider.com/bruce-berkowitz-fairholme-bank-of-america-2011-11-21#ixzz1eMk5CqtC

Nobody For President's picture

Monday morning has been a real pain in the ass these last three weeks...

JustObserving's picture

Recession is the new normal.  Unless we decide to inflate.  But even then it will be a recession in real terms. Decades of easy money have ensured our current fate. Real interest rates have to below zero to service our debts.

Real interest below zero are positive for precious metals and oil


LawsofPhysics's picture

Yes, there is a very real cost for creating capital, something the world has been ignoring for 40+ years.  Especially without bringing a real value to the system.  The good news is that the sooner this corrupt fraudulent system dies, the sooner we get to find out what the real value of everyone's labor really is, and that will be a good thing.

New_Meat's picture

tough sledding and lotsa' cold winters between here and your promised land. - Ned

Azannoth's picture

Even the most easiest and rational fixes to the problem have a Recession backed in and the real world / probable 'fixes' end in war and social chaos

BandGap's picture

No, Mr Radio Economist told me this morning that there is not going to be another ercession and that we can expect modest growth in the US and Europe.  So there.

therearetoomanyidiots's picture

Yep, I heard Kramer just went long European Sovereign debt...I'm all in...

Blank Reg's picture

And the Easter Bunny and Tooth Fairy are REAL!

Milestones's picture

Was the program preceeded by a florish of trumpeting followed by ole, ole at the end?       Milestones