FT columnist and economist, Willem Buiter says we will know by early 2010 which banks will survive and which will not:

“By the end of the year – early 2010 at the latest – we will know which banks will survive and which ones are headed for the scrap heap.  With the resolution of the current pervasive uncertainty about the true state of the banks’ balance sheets and about their off-balance-sheet exposures, normal financial intermediation will be able to resume later in 2010. Governments everywhere are doing the best they can to delay or prevent the lifting of the veil of uncertainty and disinformation that most banks have cast over their battered balance sheets.”

By the time we know which banks will survive, however, Dr. Buiter argues that the government funds needed for bank bailouts and, more importantly, the reduction in tax revenues from the coincident economic contraction will have brought to the fore the next potential financial crisis: sovereign default.

“In a number of systemically important countries, notably the US and the UK, there is a material risk of a ’sudden stop’ – an emerging-market style interruption of capital inflows to both the public and private sectors – prompted by financial market concerns about the sustainability of the fiscal-financial-monetary programmes proposed and implemented by the fiscal and monetary authorities in these countries.  For both countries there is a material risk that the mind-boggling general government deficits (14% of GDP or over for the US and 12 % of GDP or over for the UK for the coming year) will either have to be monetised permanently, implying high inflation as soon as the real economy recovers, the output gap closes and the extraordinary fear-induced liquidity preference of the past year subsides, or lead to sovereign default.”

Dr. Buiter notes how easy it was for both the US and the UK to default on their obligation in the last depression.   So, the “banks being unable to pay their bills” crisis is to be followed closely next year by the “governments being unable to pay their bills” crisis.    We see either monetization or outright default as equivalent.  The panic just begins with the bondholders in the one case and with currency holders in the other.