"All U.S. investors have to do if they want to know the risk [of a Greece default] is think 2008." So says Alec Young, Equity Strategist for S&P.
For those just emerging from a cave, 2008 was the year the financial system nearly dissolved in anarchy. Bear Stearns was taken over for almost nothing, Lehman Brothers ceased to exist, the credit agencies were revealed to be comically inept, if not corrupt, and the government went into the car business. It was a nightmare for everyone, except maybe Goldman Sachs (GS), which had an pretty solid year of trading.
In 2008 the U.S. was at least able to somewhat coordinate a shadowy bailout of the system. It was a crooked, lawless, corrupt bailout, but it prevented a total financial seizure. This time the U.S. has little to no control over the Europeans, and the Europeans have little control over themselves in as much as they have no real centralized financial control. Greece needs stimulus, Germany (the Big Dog of the EU) wants to control inflation through austerity, and French and German banks own an undetermined but HUGE amount of more or less worthless Greek debt.
According to Young, the key to holding the financial system of Europe together is Greek austerity measures being voted on this week. Quite understandably, the French, Germans and the rest have no interest in throwing good money after bad in a profligate Greece. The terms being demanded by the banks in order to prevent an official default on Greek debt involve "belt tightening... huge asset sales, like 50 billion Euro worth over the next few years, spending cuts and adjustments, which will voluntarily have to come from the debt holders."
Oh yeah, let's not forget the ratings agencies. The same clowns who ranked the CDOs and other garbage at the root of 2008's crisis are still able to control whether or not Greece's debt will become pure, unadulterated junk. It's an automatic if Greece defaults. If the debt-holding banks make "voluntary adjustments," on the other hand, it'll be up to the agencies to decide what to do with Greece's ratings.
Chillingly, the EU is "working with the credit agencies to determine what is acceptable and what's not."
Three years since rating agencies "working with banks" on over-rating CDOs catalyzed the Great Recession and our fate remains in hands of agencies like Moody's.
Think 2008 indeed.
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- Moody s
- Lehman Brothers
- Bear Stearns