Is Brexit the Lehman Moment for the $100 Trillion Global Bond Bubble?
Most economies have barely recovered from the 2008 subprime mortgage fiasco that was caused by sloppy lending practices at banks, overextended them and compromised essential liquidity to pay their own debts. Investopedia.com reports that Lehman Brothers, the fourth-largest investment bank in the United States, was forced to declare bankruptcy with $619 billion in debt versus $639 billion in assets in 2008. A vast number of defaults caused this razor-thin margin of debts-to-assets to become unsustainable, so the company filed for bankruptcy in the largest case of its kind in history.
This bankruptcy snowballed throughout the world’s economies, which intensified a mortgage crisis that devalued real estate, wiped out savings and investments and slowed the world’s economies to near-recession levels. Countries were forced to initiate economic stimulus packages, bailouts and other fixes to avert catastrophic financial consequences and bankruptcies of companies that were “too big to fail.” The recent vote on June 23rd of 2016 in the U.K. for the British countries to leave the European Union, which is commonly abbreviated Brexit, has raised concerns that this could be a new Lehman moment capable of triggering a global economic collapse where no companies are safe.
The S100 Trillion Bond Bubble Renders Economies Vulnerable to Meltdowns Like Lehman’s Bankruptcy
A report published at Bloomberg.com reports that low-quality companies and high-risk junk bonds make up about half of the speculative-grade bonds in the United States, which puts the likelihood of a U.S. recession in 2016 or 2017 at 23 percent. When this is added to the severe financial consequences of the Brexit vote and Europe’s weak banking system, where interest rates are already at zero, a global financial meltdown becomes even more likely.
That’s not even considering possible further catastrophes, European high-risk bonds, natural disasters and possible decisions by other countries to leave the European Union after Britain’s defection. A global financial meltdown on top of weak global economies and high deficits could easily stimulate a financial Armageddon according to many analysts. Another Bloomberg.com report offers the following insights:
- Europe’s bank share prices were down 20 percent before the Brexit decision.
- Deutsche Bank is only worth $18 billion, which is about the same as Snapchat.
- Greek banks have recapitalized three times with few positive results.
- Italy’s banks have 360 billion euros in debts that are at-risk of nonpayment.
- American banks, while strong, are subject to bond collapses and banking problems in Europe.
Other Critical Brexit and Debt Bubble Concerns that Worry Investors, Banks and Politicians
Not all experts agree that the Brexit situation is comparable to Lehman. ZeroHedge.com prefers to compare the risks to Bear Stearns, a hedge fund that spiraled from relative health to bankruptcy within 72 hours due to greed and miscalculations. Unfortunately, that’s the kind of thing that can easily happen in financial transactions–every deal has a winner and loser. Global leverage has expanded the debt bubble to $100 trillion globally, and Brexit could be just the first of many jolts to a tottering house of cards.
Debt has grown by $20 trillion since 2008 according to an article in InvestmentWatchBlog.com. That’s despite desperate government efforts to privatize public assets, cut work forces and reduce spending on public services, so there’s essentially nowhere to raise money in a crisis without implementing austerity measures that would rival the Great Depression in the United States.
The Risks of a Service-Oriented Economy Are Greater than in a Manufacturing Economy
Another big worry is that most of the economy is fueled by technology and digital services that could easily disappear when basic services like food production and manufacturing no longer account for most of the world’s economic output. Brexit could easily trigger economic pandemonium by forcing the European Union to allow its members to write off debt to prevent further defections. This could trigger a catastrophic meltdown in the $500 trillion derivatives market and pop the $100 trillion debt bubble in a situation that mirrors 2008 and the Lehman bankruptcy chain of events.
The world’s economies are vulnerable to political upheavals, social unrest, natural disasters, high deficit spending and other market forces that can cause economic chaos. Although many experts are predicting that Britain’s decision to leave the European Union isn’t comparable to Lehman and the banking industry of 2008, experts confidently predicted that the U.K. would stay in the EU.
It’s too early to tell how deeply Brexit will affect financial markets and political decisions in other countries. The recent stimulus programs throughout the world have rendered economies even more vulnerable to financial crises, and nobody can predict the consequences of financial mismanagement, record-setting deficit spending and political movements such as the Arab Spring or the European Union’s possible dissolution. Find out more about the $100 trillion bond bubble, Brexit and investment risks by visiting the PersonalMoneyStore.com.