Lehman fallout threatens deeper, wider recession

By Emily Kaiser - Analysis

WASHINGTON (Reuters) - The fall of Lehman Brothers raises the risk of a deeper U.S. recession that engulfs a broader swath of the global economy as skittish banks around the world lock their vaults.

Countries that had so far escaped the yearlong credit crisis largely unscathed scrambled on Monday to quantify the potential losses after Lehman Brothers Holdings filed for bankruptcy.

Banks' borrowing costs soared because of the uncertainty over how far and wide the Lehman impact might extend. If that translates into a crackdown on lending terms for companies and consumers, the economic fallout will be severe.

U.S. growth prospects already looked gloomy even before this weekend's drama, which also included Merrill Lynch agreeing to be bought by Bank of America and insurer AIG looking for financial help.

"At this point, the U.S. will be lucky to escape with a mild recession," said Ken Rogoff, a Harvard University professor and former International Monetary Fund chief economist.

The pain quickly spread to Asia and Europe.

In Taiwan, which had reported little in the way of losses from the subprime mortgage mess, the top financial regulator said Lehman-related exposure for its companies and retail investors totalled $2.5 billion (1.4 billion pounds). Two Japanese banks appeared on the list of major Lehman creditors.

In Europe, Germany's Finance Minister Peer Steinbrueck said the initial impact on Germany was limited, but Economy Minister Michael Glos said Lehman's collapse could seriously harm Europe's biggest economy.