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Sept. 29, 2011, 12:01 a.m. EDT
By Jonathan Burton, MarketWatch
SAN FRANCISCO (MarketWatch) "” There really is no polite way to convey what Satyajit Das is saying about the world that investors will face for several more years, but it must be said: The unwinding of the global debt crisis will make some people extremely wealthy, but most of us will have to live with less "” in some cases far less.
Das is a Sydney, Australia-based risk consultant and for many years has been a leading expert on the use and abuse of credit derivatives. So after watching the world's governments, businesses and consumers binge on cheap, borrowed money, and seeing central bankers and financial regulators doing little to stop it, Das decided this party would end badly.
Soft-spoken and matter-of-fact, Das told anyone who would listen that the global economy was on the precipice of a credit crash which would trigger a worldwide deleveraging and the mother of all bear markets for stocks.
That was in 2006. Five years and one global debt crisis later, those same governments, businesses and consumers are hamstrung. Read more: Don't count on 'Markozy' to save Europe.
"People wasted trillions of dollars, which now has come home to roost," Das said in a telephone interview from London earlier this week.
Put simply, at this wee hour of the global economy's morning, partygoers are still too hung over to even have a coherent conversation about cleaning up the mess, let alone pour more drinks to get the festivities started again.
The problem child in this debt crisis and credit crunch is Europe, said Das, whose latest book is entitled "Extreme Money: The Masters of the Universe and the Cult of Risk."
European leaders dallied and so delayed the day of reckoning, he said. "The real problems were never dealt with," Das said. "If you never really deal with the problems, then obviously they come back to haunt you."
Now, Europe's policy makers, the European Central Bank and the International Monetary Fund are grappling with a fragile banking system that is intertwined with debt-ridden governments, a liquidity crisis in which banks are reluctant to lend to one another, and a parched global economy that resists efforts to push life-giving credit into its system.
Accordingly, Europe's meisters and ministers are trying to orchestrate an orderly default for Greece, one that also recapitalizes weak European banks with heavy exposure to troubled Greek debt and props them up enough to deal with an anemic global economy in which, notably, even China will be impacted. Read more: Global markets need German keg tapped.
But once Greece restructures its debt "” and it is a matter of when, not if, Das said "” Ireland and Portugal may not be far behind. And then there's Italy, which is saddled with an even more suffocating fiscal weight. Read more: Greece and the euro-zone's worst-case scenario.
"In Europe the steps are extremely straightforward if they want to do them,' Das said. "Greece, Ireland and Portugal have to restructure their debt. That will lead to losses of between 35% and 75%" on bond principal, he added.
"When that happens you trigger massive losses in the banking system," he continued. "And if Greece and Ireland and Portugal go, then companies within these countries whose debt we don't talk about will also be problematic. Economies will go into deep recessions. The losses will be substantial." Read more: Road map to euro salvation.
The amount of money needed to shore up this crumbling wall will be enormous, and may even require the recapitalization of the European Central Bank itself through funding from other central banks or money-printing, Das said. His reality check for Europe (and the big U.S. money-center banks that are also exposed to euro-zone woes): "Let the countries fail, recapitalize the banks, put German and French balance sheets at risk, and gain competitiveness. Then at least you've got a chance."
In an overly indebted world, this is what passes for "orderly" default. In a disorderly event, Das said, "self-interest dominates."
Financial markets at the moment are priced for such an orderly default, he noted, though more on the order of a 20% haircut than 50% or worse. Said Das: "They're assuming the people in charge will manage to muddle their way through."
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