Is this crisis the same as the last one ?

Following the massive proposed 1 trillion euro rescue package for the Euro, we now have the markets worried that perhaps the Europeans and the ECB may not back up that package as much with actions as they did with words.

And so, markets being what they are, the markets are waiting to see if we will get the sovereign debt version of the Lehman Brothers default, with all the financial contagion that followed.

There are two important differences between what happened in the US housing market, which of course then affected the rest of the world in terms of the credit system, and what's happening in Europe. One good and one, potentially, not so good.

The good point is that the liabilities are much more transparent. Thinking back to what happened in the US housing market, especially the subprime market in 2007/2008. It was very difficult to know just what the scale of the problem was, because all of these mortgages had been made and sliced up and resold and securitised in so many different ways. It was very difficult to really quantify the scope of the problem.

Further complicating the situation, you had lots of lots of tasty new products, such as collateralised loan obligations, CDOs, CDOs-squared, etc. which even the "masters of the universe" didn’t really understand.

The current situation in Europe is much more transparent. In particular we know where all the borrowers are and, pretty much, how much they owe, and how much "income" they have to pay off their debts.

The potentially bad news however is that when the US Sub-prime market problems became exposed, the US stock market gave Congress a good kick in the backside and forced the US Congress to realise they were all in the same boat. This was no time to play politics unless they wanted the US financial system to freeze up.

Unfortunately, this may not be the case in Europe, as the Germans, the French, and the Italians are all in very different boats. Some (OK, the Germans) are fiscally much more responsible than others, and so their interests are not aligned in the same way as were the Americans in 2007/2008.

Germany has very different incentives than, say, Italy or Ireland, because their sovereign balance sheets are in a very different shape. This brings the strong possibility of procrastination and the likelihood of actions not backing up the recent bold plans.

At the end of the day this is political risk, and financial markets hate political risk for the simple reason that it is hard to put a price on it. If they can’t put a price on it, the safest route is to price downwards. The Europeans are going to have to realise that we are all in the same boat, and they need to do so pretty soon.