Bond traders and officials at the European Central Bank (ECB) have been unified in their warnings that a restructuring of Greece’s debt would set off an investor panic similar to the one that followed the Lehman Brothers bankruptcy.
Others, however, have argued that Greece’s debt of ¤330 billion, or $473 billion, while too large for the country to bear, is small enough to allow banks and other institutions to take a loss without bringing the world financial system to its knees.
But the comparisons between Greece and Lehman grew more frequent last week as global markets reeled, spurred in part by the view that Germany’s insistence that private investors participate in a second rescue package for Athens would overcome the objections of the ECB.
“It is a valid concern,” said David Riley, head of sovereign ratings at Fitch. “The Rubicon would be crossed — we would have a sovereign default event and that can be quite a shock, not just for the peripheral countries but for Spain and beyond.”
The thinking goes like this: though banks and other investors have done much to pare their Greek holdings in the last year, if they are forced to take a loss, and the ratings agencies declare Greece in default, investors would start selling in a panic. And they would not sell just the bonds of countries struggling with debt — Portugal, Ireland, Spain and Italy. In a hasty retreat into cash, traders would unload more liquid assets as well, everything from high-grade corporate bonds to American and emerging market equities — as occurred in 2008 after Lehman failed.
To be sure, much has to be wrong for the European debt crisis to approximate what happened after Lehman failed in 2008. Not only did banks, hedge funds and insurance companies immediately seize up, but the effect on the broader global economy was also striking as trade flows nearly ground to a halt.
Analysts point out that the global financial system has survived sovereign defaults in the past, including Russia’s in 1998 and Argentina’s in 2001.
Also, since the prospect of a Greek default has been foreshadowed for so long, financial institutions have had sufficient opportunity to reduce their holdings of Greek debt. But in doing that, the private sector has passed much of the exposure to Greece and other troubled economies in Europe to public sector entities like the ECB and the International Monetary Fund (IMF). That means that if a restructuring comes, the taxpayer will pay.
Lending weight to the fears of another Lehman crisis, regulators are warning that in such a situation, even super-safe money market funds may not provide the risk-free refuge they proclaim to offer.
©2011 The New York
Times News Service
