As the last few weeks have shown us, the credit crisis is a global phenomenon. It first hit the U.S. financial system and it has now ,started to hit the Euro Zone. The question is whether the effect of the crisis will be smaller or larger on the Euro zone banking system.
Banks in Europe have, on average, a higher leverage level than U.S. banks. This can only serve to increase the magnitude of any effect. Additionally, it has been articulated by experts that the banks in Europe are “better at hiding things”. Hence, with less transparency and higher leverage, things do not look well for the Euro Zone.
If you go back a few weeks, it seemed like the banks in Europe were fine. There were even talks about the Euro-zone being able to de-couple from the U.S. crisis. However, as we have witnessed, if the U.S. goes down, everyone goes down.
On a side note, it is important to remember the amount of wealth that has been wiped out in the last 2 weeks or so. In the U.S., judging by the fall in the Dow Jones Wilshire 5000 Composite Index, around 7 trillion dollars of wealth is gone.
Something to think about.
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