Carl Weinberg, chief economist at High Frequency Economics, says the debt crisis will lead Europe into a depression that brings soaring unemployment, deflation and zero interest rates for the foreseeable future.
Weinberg thinks losses could be as much as 50 cents in the euro, which would mean a 1.5 trillion euro hit to the financial system.
"In comparison, Lehman's bankruptcy left about 600 billion euros ($818.78 billion) in assets to be resolved, Weinberg wrote in a research note published in part by CNBC.
"This is a shock that could easily spread around the world quickly, as did the hit from Lehman."
According to Weinberg, the most important thing the European Central Bank can do at this time is to use its repo facility to ensure that all banks have enough cash to operate regardless of their short-term solvency or longer-term prospects.
“The ECB will have to buy a dominant position in all PIIGS bond markets, sterilize those purchases by absorbing cash, and then return that cash to banks in long-term repos,” says Weinberg, who expects such a move to add 2 trillion euros ($2.731 trillion) to the ECB’s balance sheet.
Because euro zone members do not agree on the scale of the European Financial Stability Fund and have no TARP equivalent, Weinberg says governments will have to come up with individual plans for recapitalizing their banks.
“Not all will be able to do so,” says Weinberg. “For stronger fiscal players, like Germany and France, funding can likely be found to create national banking support systems,” said Weinberg, who believes attempts at fiscal consolidation be “torn asunder.”
Bloomberg reports that the euro dropped to its lowest level since 2001 against the yen as speculation German Chancellor Angela Merkel is preparing for a Greek default curbed demand for the 17-nation currency.
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