The American sharemarket fell around 2.3% overnight and, as we always see during a global crisis, money flooded into the US dollar.
Furthermore, to compound the nervousness, traders in commodities were scared that the Goldman Sachs' revelations would cut the vast sums investment banks channel into commodity trading.
Last night, Berlin reminded me of New York in 2008. Back then, Americans were saying that it was those 'dreadful Wall Street gamblers that got us into this mess so why should we bail them out?' And so Lehman was left to fail and we found that the world financial system teetered on the brink because banks ceased to trust each other's solvency.
Now in Berlin, they're say saying that those 'lazy Greeks have been rorting the system for years and giving themselves benefits based on borrowed money. Why should we bail them out?'
Just like Lehman, if the world does not bail out Greece and Portugal (let alone Spain, Italy and Ireland) and these countries default on their loans, then the global banks who loaned them the money are going to suffer enormous losses. And the hardest hit will be the European banks. Ironically, the people who will suffer most may not be the Greeks but rather are those who are refusing to bail out the Greeks.
The markets have been confident that Greece and Portugal were 'too big to fail' and the world would not put itself in danger of another Lehman.
I think that as we get close to a crisis, that belief will probably turn out to be correct. But as last night's events showed, we going to go right to the brink and the closer we get to the edge the more likely it is we will fall over into new territory.
The underlying problem is that the euro does not work. Imagine what would happen if Australian states were a series of countries with one currency. The weaker states would be decimated because their currency would be too high. That's what's happening to Greece, Portugal, Ireland, Italy and Spain. The currency of these countries needs to fall to reflect their economic position. Europe papered over this underlying problem because the poorer countries were able to borrow vast sums from banks. That process has now reached the end.
If Greece defaults, then the country will leave the eurozone and their currency will be slashed, plus the $100 billion or so that they have in debts will be lost. Greece can start the process of rebuilding. But that leaves the euro in tatters and the big banks who were stupid enough to lend to people who could not pay with enormous losses.
As Europe and the world look at what that means, a rescue will look more and more attractive – but it's not a certainty.
This article first appeared on Business Spectator.
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