Greece: Time to Panic

'The real risk here is to Eurobanks. They ran with even higher leverage ratios than US banks, they are believed to have recognized less of the losses thus far on their books than their US peers. Even worse, readers report that the major dealers (and the Eurobanks were part of this cohort) are carrying toxic assets at prices that are vastly above likely long-term value. Eurobank exposure to Greece is over $190 billion, and total periphery country exposure is roughly $900 billion.

In the subprime crisis, many pundits and the Fed itself thought the losses would be contained, unaware that for every $1 in BBB subprime bonds, another $10 in CDS had been written, and that many of these exposures sat with highly levered firms, namely insurers and dealers, who were not able to take much in the way of losses. The gross level of exposures looks much worse here and the banks most at risk have not done much (save take government handouts) to rebuild their balance sheets.

So the whole idea that the financial crisis was over is being called into doubt. Recall that the Great Depression nadir was the sovereign debt default phase. And the EUâ??s erratic responses (obvious hesitancy followed by finesses rather than decisive responses) is going to prove even more detrimental as the Club Med crisis grinds on.

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'But Mr. Cameron has just been dealt a potential ace by the markets. It will be interesting to see if he realizes this and works out a way of playing it in a manner that voters understand.

The worsening crisis in the euro zone has attracted very little attention in the general election, thus far. After all, the U.K. isn't a member.

However, the growing crisis is at root about large debts and the markets demanding that states start taking serious action. When Mr. Brown says that there is no imperative to makes cuts, Mr. Cameron can point to what is going on in the euro zone and say with some force that here is a clear warning from next door. Britain isn't yet in line for the ire of investors; it might be sooner than one thinks if action isn't taken this day.

Meanwhile, Mr. Clegg wants to join the euroâ??putting him in an interesting position Thursday night.

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