Lehman moment: Is Europe facing another Lehman moment? Turmoil in Greece has prompted inevitable comparisons with the contagion that followed the Wall Street investment bank’s collapse in September 2008. But so far the strains are less obvious.
The best sign of banking contagion is the rate at which euro zone banks lend to each other. The gap between the overnight rate, called Eonia, and three-month Euribor is a particularly good indicator of whether banks are nervous about lending over a longer period. Between the collapse of Bear Stearns in March 2008 and the aftermath of Lehman six months later, the Eonia-Euribor spread widened from 40 basis points to over 100 basis points. Today, it is only 20 basis points - and has tightened appreciably in the past few months.
True, Europe’s interbank market is distorted by the European Central Bank’s willingness to provide large amounts of liquidity to institutions that would otherwise have trouble borrowing. The central bank is keeping lenders in peripheral countries like Greece and Ireland afloat.
Overall, however, the ECB is not as much of a crutch as it was. As of June 2, it had lent 417 billion euros through its open market operations. That’s half the amount the ECB extended in the months after Lehman failed. It’s also well below the central bank’s intervention at the time of the first Greek bailout in May 2010.
Even so, investors are not exactly relaxed. Euro zone bank shares currently trade at an average of less than 60 percent of book value. That’s slightly below the valuation in the aftermath of Lehman, though still above the low point of early 2009, when the average euro zone bank was worth just 35 percent of book value.
European banks’ credit default swaps are also showing signs of strain. In early September 2008, days before Lehman went bust, the ITraxx index of CDS prices for large European financial groups was 15 basis points below the equivalent index for European corporations. Now, the financials index is 60 basis points wider than the corporate index - up from 25 basis points in April. Another Lehman moment may still be some way off. But investors are clearly preparing for more bad news.
