The Gary Null Blog

By DEAN BAKER

http://counterpunch.org/baker08232011.html

The world financial system had another serious scare last week. The immediate issue was the prospect that the euro could break up. With the debt crisis spreading from smaller countries such as Greece and Ireland to the eurozone giants of Spain and Italy, events were again getting scary.

A default by the smaller countries would create serious disruptions throughout the eurozone and the larger world economy, but no one doubts that these could be contained. The European Financial Stabilization Fund (EFSB) is large enough to paper over the mess that would be created by the default of Greece or Ireland.

However the default of Spain or Italy is an entirely different matter. If either country were to default, the repercussions would be enormous, dwarfing the resources of the EFSB. A default would almost certainly make several major European banks insolvent and lead to the sort of freeze-up of the financial system that we saw after the bankruptcy of Lehman in September of 2008. With the interest rate on Italian and Spanish debt soaring, the financial markets had to take this risk seriously.