Open Europe Blog

Oven on Guardian Comment is Free, we argue that “The narrative now cemented in the public imagination that Greece could be the ‘next Lehman Brothers‘ is, for the most part, largely overblown.”

We argue,

beyond the headline-grabbing rhetoric, the comparisons simply don’t stack up. Firstly, the majority of those peddling this myth have a significant vested interest in avoiding a Greek default or restructuring. It was the European Central Bank that first floated the Lehman analogy. Why? Sheer self-interest. By propping up Greek banks and the Greek state, the ECB has taken on €190bn worth of Greek assets, which would face radical write-downs should Greece default.

Many commercial banks across Europe have joined the chorus of scaremongers (“liquidity will dry up”, “contagion will spread”, “savings will be wiped out”, etc) for much the same reason. The banks’ passion for more bailouts is not altruistic, but stems from the desire to ensure that profits remain private, while losses continue to be socialised.

But here lies the crucial difference. Unlike with Lehman, both governments and the financial markets have had over a year to prepare for a potential Greek default, with plenty of warnings leading up to last year’s (first) breaking point. Even as late as February this year, investors could have walked away from Greek bonds with only 20% losses (as they continued to trade at 80% of their nominal value) – a good deal considering the mess Greece is in. A Greek default would not reveal a new hidden world of risk. Neither are the connections to Greek debt within Europe’s banking sector as substantial, despite remaining opaque. But rather than finding new ways to safeguard banks’ exposure to Greece, shouldn’t we really be asking why these banks haven’t reduced their exposure to Greece and deleveraged?

We go on to say

On top of this, the Lehman crisis was the tip of a huge iceberg. It revealed banks’ huge exposures to the US mortgage market – large parts of which turned out to be bust. Again, note the contrast to Greece. The problems with the eurozone periphery are well documented but are also country specific.

Noting that the risk of contagion from a Greek default is very real but cannot be compared to that following the Lehman collapse, we conclude,

Ultimately, if a country with a GDP of only 2.5% of the European economy can bring down the entire system, that’s probably a sign that the system is fundamentally flawed. Regrettably, politicians are using the misguided comparisons with Lehman Brothers as an excuse to ignore and perpetuate Europe’s real problem: an unhealthy, undercapitalised banking system and a monetary union based on the premise that political leaders’ commitment alone could make economic and democratic realities disappear.

Now that’s what you call playing with fire.

Read the full article here.

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