Black Tuesday as US markets revalue to global banking crisis part two

US markets open today after a holiday on Monday and face a mounting global banking crisis centred on Europe that yesterday pulled equities down by more than five per cent in Germany. It is going to be a Black Tuesday with US futures down two per cent.

As they return to work US brokers still have the US jobs disaster of last week’s unemployment figures in their heads but the real crisis is emerging far away in the eurozone, and few have yet to digest its real implications.

European banking crisis

When the the head of Deutsche Bank warns that many smaller European banks will not survive the sovereign debt implosion that is about to happen, and says that this situation looks very much like the autumn of 2008, it is time to head for the hills.

He could also cite the parallel with 1931 and the credit crisis that originated in Europe from the collapse of the Credit Anstaldt Bank in Austria. That brought on the worst years of the Great Depression.

But such remarks are not made lightly and indeed you have to wonder what the head of a major bank is doing in making them at all. It is certainly far from being a positive indicator, and you could say what would be worse?

In the eurozone the sovereign debt crisis lurches from worse to worse. US observers assume that the EU will get its act together but there is no sign of this happening. Rather the EU officials almost seem to want a crisis to extend their central powers in an emergency. Perhaps they realise that they will not get such power without it.

That is surely coming. However, the collateral damage is going to be enormous. Small banks will fail and so will small countries like Greece and possibly others. Have US banks insulated themselves entirely from this? Hardly, there will be a massive contagion as nobody is stress testing on this scale or has recapitalized to face this storm.

US subprime mess

Meantime, the US banks are still dealing with their own subprime lending crisis, and as the economy stagnates rather than grows the mortgage deliquencies can only go up and the write-offs rise.

A financial system full of bad debts has to purge itself one way or another. Only then can the pieces be picked up much more cheaply and a recovery follow.

What we are paying now is the price for not allowing some kind of systemic collapse in the global financial crisis three years ago, welcome to part two, the real Day of Reckoning.