Hello, American reader. We know there are things in this world you care very deeply about: The NBA finals, the "True Blood" premiere, Apple's shiny new toys. We care about those things, too.
We also know there are some things many of you care very little about, unless you happen to be going there for vacation: Greece, Spain, Italy--Europe.
But you should care! How much should you care? Let's play a quick word-association game. When we say "Lehman Brothers," what do you say? Acceptable answers include: "Help!" "Holy crap!" and "Where is all of my money?"
So, to bring this back to Europe, those "Lehman Brothers" responses should give you a rough guide to how much you should care about Europe. Yes, it's just about that bad.
As you may have overheard somebody mention around the office, Europe is back in trouble again. Spanish 10-year bond yields hit a record high of nearly 6.7 percent today, according to data provider TradeWeb, despite a 100-billion-euro agreement over the weekend to bail out Spain's banks. Italian bond yields are surging, too, as investors start to worry it will be the next to need a bailout. A European Central Bank plan to solve the euro zone's long-term problems offered a temporary market salve, but the euro zone could be back in trouble as soon as this weekend, when Greeks vote in elections that could decide whether Greece stays in the euro zone.
We see you drifting off there, your eyes glazing over.
But really, this is not some esoteric thing you need to know about only because you may want to look smart at your next cocktail party or tractor pull. This is something you need to know about because it could be the next Lehman Brothers.
We'll now take your imaginary questions.
Come on, really?
Some of you will likely respond: Oh, stop trying to scare us. America is awesome and doesn't have to worry about European countries, which are tiny, with tiny little economies, a fraction of the size of ours. It's science, you'll say, science that says we shouldn't care a bit what happens to Greece or Spain or one of those other countries with good food, warm weather, attractive people and small economies.
But those tiny little countries are all mashed together into one big, unhappy marriage, sort of like another HBO show, "Big Love." Together, the 17 countries in the euro zone have the third-biggest economy in the entire world, just barely smaller than China's, according to International Monetary Fund measures.
And it's all interconnected, by trade and, more importantly, by banking. French and German banks lend money to Spanish and Italian banks, et cetera et cetera. Spain goes down, and you've suddenly got to start worrying about France. And Germany.
Again, blah blah blah, European words. How does this affect Americans?
Once you're worrying about France and Germany, you've got to start worrying about U.S. banks, too. They smartly dumped a lot of their Greek and Spanish and Italian debt a long time ago. But they still have a lot of debt of France and Germany and other supposedly "safe" European countries. And investors are just now getting around to questioning the creditworthiness of those countries, which will end up footing most of the bill if Europe needs to bail out big economies like Italy and Spain (again).
U.S. banks had about $500 billion in exposure to core European countries at the end of 2011, according to a recent Wells Fargo report, including about $200 billion in exposure to banks in those countries.
"The direct effects on the American banking system of a sovereign default in either Spain or Italy would be rather limited," the Wells Fargo economists wrote. "However, the European banking system would be severely affected by the default, and these shock waves would then be indirectly transmitted to the American banking system and economy.
"In sum," the Wells economists added, "a sovereign default and exit from EMU by either Spain or Italy could be another 'Lehman moment.'"
To make matters scarier, that $500 billion in exposure does not include credit-default swaps, the derivatives banks and hedge funds use to buy insurance against a bank or a company or a government defaulting on its debt. The trouble is, as Peter Eavis of the New York Times and Stephen Gandel of Fortune have written recently, the banks aren't exactly, how do you say, "telling us" how much CDS exposure they have to various countries, so it's hard to get a handle on the size of the problem.
The banks do tell us not to worry so much, that their exposure is almost nothing, because they have enough contracts that offset each other. But, as The Atlantic's Jordan Weissmann points out, the Lehman Brothers collapse demonstrated that, in a crisis, those contracts can go out the window when your trading partner is having a near-death experience. And the uncertainty about where these dangers lurk and how big they are can cause the whole financial system to freeze up. Bingo, you're in Lehman Land again.
All right, let's pretend I'm convinced by your scare-mongering. Does this mean my money is about to be set on fire?
For the time being, meaning this afternoon, your money seems safe from another Lehman moment. But things can change very quickly.
Twenty-four hours ago, it was touch-and-go. Then, everybody was disappointed that a 100-billion-euro bailout of Spain's banking sector did not immediately bring a permanent halt to the European debt crisis. Financial markets around the world were crumbling. Spanish and Italian borrowing costs were surging.
Today, everything is bouncing back, largely because of a memo from the European Central Bank that laid out a very credible-sounding game plan for saving the euro zone from ultimate disaster. It included a suggestion that Europe put together a scheme to guarantee all European bank deposits, sort of like a Federal Deposit Insurance Corporation for Europe. That would prevent bank runs in individual countries -- the threat that inspired this weekend's Spanish bank bailout -- and ease a lot of the pressure on stressed-out governments and the ECB to help.
So the market likes the sound of this plan. But it is only a plan. Putting it into action could take months, or years, and involve a lot of painful political wrangling, at a time when European voters' patience is wearing thin.
So what happens next?
Speaking of voters' patience wearing thin, the next big event in this drama comes Sunday, when Greek voters go to the polls to elect a new government. And those voters are in a bad mood. They're angry about past bailout deals that have forced them accept painful belt-tightening measures. They see that Spain got a big honking bailout without such measures, and they may be inclined to try to elect a government that will throw away the old bailout agreements and work on a new one.
There is a one-in-three chance that the election means Greece leaves the euro zone, "almost by accident," Standard & Poor's analyst Moritz Kraemer wrote in the Financial Times.
And a messy Greek exit from the euro zone could be enough to trigger a Lehman moment, Wells Fargo economists warned.
"Government borrowing costs in Spain and Italy would spike as investors question the ability of those countries to remain within EMU," they wrote. "Eventual default and EMU exit by Spain and Italy then follow."
Wells doesn't think such an outcome is likely, but it does think the risk is "not insignificant." What seems likelier for the short term is that Europeans once again do what they do best: shove their problems a little further into the future, where they can deal with them later -- maybe at their next big summit meeting, scheduled for June 28 in Brussels. But don't hold your breath for any big decisions then, either, German Chancellor Angela Merkel has already warned us.
What happens to the U.S. in the worst-case scenario?
A global recession and new banking crisis will lead to another recession in the U.S., as trade, confidence and credit dry up again. President Obama gets voted out of office (probably). President-elect Romney inherits a global financial crisis. To fight the recession, the U.S. spends a ton and goes even deeper into debt. Or it doesn't spend a ton and we have a depression.
OK, so, yikes. What can be done to stop it?
Not a lot. President Obama and other U.S. policy makers could push Europe to work harder and faster on long-term solutions. But the long history of the European credit debacle, which is in its third year, is that Europeans seem to enjoy cliffhangers: They don't start working on solutions until the last possible second, when all seems lost. And then they do only the bare minimum necessary to fend off death. It's a dangerous game they keep playing with financial markets.
It would almost be entertaining if we weren't all along for the ride.
The Morning Email helps you start your workday with everything you need to know: breaking news, entertainment and a dash of fun. Learn more