Tuesday, September 16, 2008

If AIG collapses, the meltdown will really be global

Back in July, we said that it was now becoming evident that the greatest threat to the global economy was not rising core inflation, but the US credit crisis.

Now here comes the biggest kahuna in the financial markets to possibly fail – AIG. While a bankruptcy by Lehman will shake the US financial system to its tethers, a failure by AIG will be globally catastrophic. To give perspective on the extensive list of countries where AIG has a major presence as an insurer or financial counterparty, click here.

With AIG now on the line, the financial crisis will no longer be just tied to the US housing crisis, it will extend to all economic activities in the world that function on the confidence of insurance coverage. Imagine how much more insurance coverage will cost if it fails. Imagine how many pension accounts will be lost.

The tumble in equities and derivatives in various markets worldwide that will be caused by an AIG asset liquidation will be huge, that otherwise healthy banks operating in still healthy economies could suddenly find themselves severely undercapitalized.

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