The Run On Europe Begins, As Global Investors Head For The Hills...

Until recently, the concern about Europe was mostly theoretical--a potential train-wreck that would occur if/when the world's lenders decided that the continent's problems extended beyond the basket case known as Greece to Europe's "core."

Well, that concern is no longer theoretical.

It's happening.

The world's lenders are increasingly deciding that it's better to be safe than sorry, and they're pulling their money out of Europe.

As a result, the borrowing costs of many European countries are rising fast. And so are inter-bank lending rates, because the second huge problem with the Euro-train-wreck is that Europe's banks have Euro debts coming out of their ears.

(When bond yields rise, the market value of existing bonds drops, so any bank that owns the debt of any European country is suffering huge embedded losses. The banks don't mark these losses to market, so you can't see them on the balance sheet, but they're there.)

Last week, Italian borrowing costs soared over 7%, which has been viewed as a sort of Rubicon level. Spanish yields hit nearly 7%. And French "spreads" over German bonds expanded sharply.

Nelson Schwartz in the New York Times has some other details:

• The Royal Bank of Scotland and pension funds in the Netherlands have been heavy sellers of European sovereign debts in recent days.
• Kokusai Asset Management in Japan unloaded nearly $1 billion in Italian debt this month.
• Vanguard let a $300 million CD with Rabobank expire earlier this month and pulled the money out of Europe
• European banks like SocGen and BNP Paribas cut exposure to Italy by 26 billion euros in Q3
• American money-market funds have cut their exposure to European bank paper by 54% ($261 billion) since May

And so on.

The interbank-lending problems, by the way, are exactly what happened in the United States in 2007 and 2008.

If the run continues, for banks and countries and companies that live on borrowed money, the effect will be similar to the oxygen being sucked out of the room.

And because of the absurd opacity of bank balance sheets, there's no way to tell when or if some critical threshold will be breached and banks and insurance companies (think AIG) will suddenly have to start handing over tens of billions of dollars of "collateral" to counter-parties, blowing huge holes in their balance sheets.

Importantly, once runs like this get started, they can accelerate fast. Recall how quickly Bear Stearns and Lehman Brothers went from angry denials and "exploring options" to bust. Recall how quickly, a month ago, MF Global went from confident to flailing to broke.

Read the rest here.