GFC phase 2

ABC 9 August

STEPHEN LONG It was the biggest binge in history. Before the GFC, the world gorged on debt. Credit was cheap and easy, it was almost force-fed and lending was super-sized. Ninja loans: that's no income, no job, no assets. Then Wall Street took the loans, packaged them up into fancy financial products and passed the debt parcels around the world. But after the binge came the purge.

September 2008: the Wall Street icon Lehman Brothers collapsed. Then the world's largest insurer, AIG, went broke, sparking a global credit crash. The engine of commerce seized as lending dried up. Share prices slumped as the biggest credit bubble in history burst. Banks failed, as the dodgy loans and fancy products they fashioned out of them imploded. The world plunged into the deepest downturn since the Great Depression.

But the GFC never went away. It just morphed from a private debt crisis into a public debt crisis.

SATAJIT DAS, RISK ANALYST AND AUTHOR: In 2008 and 2009, when the global economy got into problems, the Government spent up big to try to stabilise the economy. And they succeeded to a point. But the problem is we've been passing the parcel of debt. So companies passed it to individuals, individuals passed it to governments. Now of course, the governments have nobody else to pass it to.

STEPHEN LONG: In early 2010, Greece was bailed out by the European Union. Next, Ireland and Portugal had to be rescued from potential default. Then last week, the crisis spread to Italy and Spain. The world panicked and shares tumbled as the cost of funding the public debt of Italy and Spain soared to unsustainable levels.

SATAJIT DAS: The situation in Europe is very serious, but it's not about Greece, Ireland or Portugal. It's really about Spain and Italy, which, as is commonly said, are too big to save, but they're too big to fail.

STEPHEN LONG: Across the Atlantic on the weekend, inglorious history was made. The US had its credit rating downgraded for the first time.

The mining boom and the rapid industrialisation of Asia has insulated Australia's economy, but that may not last if the sovereign debt woes in Europe create bank losses and another credit crunch.

SATAJIT DAS: Despite the fact that our commodities boom is ongoing, Australia still needs to borrow very large sums of money overseas - this is the banks and the business need to borrow. If there is another credit crunch, then what will happen is the cost of money will go up again and the availability of money will go down, and that will have an immediate impact on the Australian economy in terms of growth.

STEPHEN LONG: And all this against the backdrop of the weakest recovery from the bleakest recession we've had since the 1930s, and it's not over yet.