historically, following a wave of financial crises especially in financial centers, you get a wave of defaults. You go from financial crises to sovereign debt crises. I think we're in for a period where that kind of scenario is very likely. I don't think a repeat of the fall of 2008 is at stake here, where it looks like the world is going to end. But I do think there is still, for reasons that are beyond me, quite a bit of complacency out there. Eastern Europe is another source of concern, and Europe has limited resources. You can rescue one. You can maybe rescue two. But you can't rescue all of them. The Baltics are very vulnerable. Romania is vulnerable. Hungary is vulnerable. Problems in these countries feed back to their lenders. Austrian bank exposure to Eastern Europe is great. The Italian exposure to Eastern Europe is great. The Swedish exposure is non-trivial.
It's probably not a good idea to position myself to the pessimistic side of Reinhart, but I am tempted to do that. I think that at this point, a wave of sovereign debt crises would make the 2008 Lehman-Freddie-Fannie-AIG collapses seem like a walk in the park.
Psychologically, there is no worse time to hit someone with a new problem than just after they think their troubles are over. The markets have been thinking that we've put the financial crisis behind us. I do not think that investors and taxpayers have the stamina to go through another round of collapses and bailouts.
The key indicator to watch will be the interest rate on Treasuries and the value of the dollar. So far, the rumblings in Europe seem to be causing people to once again flee to the good old U.S. of A. But I'm not sure how long people are going to feel comfortable with putting more of their eggs in the U.S. Treasury basket. My guess is that the expiration date on our "safe haven" status is no longer measured in years, but in months. Or it could be weeks.