As Sunday's Greek elections approach, there's a rising consensus and concern that the plebiscite could prove to be a Lehman Brothers moment for Europe. That is to say, if the hard-left bailout-denouncing Syriza party wins, it could set off a cataclysm in the markets, a chain reaction that would set neighbors and then the whole world on fire.
So is it September 2008 all over again?
In one sense, it's an apt analogy. In the summer of 2008, the powers that be thought that, after a series of frustrating and partial bailouts of the financial sector, letting a large, leveraged entity default on its debts would have limited impact. But the Bush administration, the Federal Reserve and Wall Street leaders failed to view the situation in three dimensions.
For example, it's clear nobody in the Treasury Department thought that a Lehman bankruptcy filing would paralyze and threaten to kill the massive money-market fund industry, where companies and individuals keep their cash. (Lots of money-market funds, it turned out, held Lehman Brothers debt.) The poobahs sitting around the tables at the New York Federal Reserve didn't peer ahead and see that it might kill the commercial paper market, freeze trade finance and make it nigh impossible for solvent banks to issue new debt. If they had envisioned such results, they would have likely thought twice about letting Lehman go.
The Collateral Damage
The same certainly holds true for Europe today. There's very little evidence of three-dimensional thinking by top policy makers. The impact of a Greek default, or of a Greek exit from the Euro, wouldn't simply fall on Greece and the folks to whom the government owes money. It would fall on markets, companies and institutions, near and far, that are connected to Greece, in some cases tangentially. A Greek default would almost certainly cause Cyprus to seek a huge bailout, for example. Implode a warehouse sitting in an open field and you can be reasonably sure there will be little collateral damage. Knock over a skyscraper in the middle of a densely populated area, filled with buildings, infrastructure and utilities, and you have no idea what will happen. Greece, as small as it is, and as isolated as it has become, stands in the middle of a densely populated area.
As American policymakers did in 2008, European policymakers similarly tend to disregard the impact their actions — or lack of actions — will have on confidence and the psychology of the markets. If Greece officially decides to go bust, investors will conclude — rightly or wrongly — that all sorts of other institutions could do the same, and invest accordingly. That's how a crisis turns into a panic.
But there are some important differences between Lehman Brothers and Greece that we should keep in mind. The Lehman Brothers failure was a binary, decisive, quick action — when it closed for business on Friday, it was solvent; by Monday morning, it was bankrupt. That quick switch had massive, immediate consequences, and caused people to panic.
A Long, Slow Exit It Would Be
This Sunday's elections are unlikely to prove a similar event. Whatever the result, given Greece's parliamentary system, it will take several days to sort out who will run the government and which policies will prevail. It's even possible that no clear result will emerge, as was the case after the last election. Assume for the moment that the hard-left Syriza party wins a massive victory and its leaders Sunday night announce their intention to default on Greece's debt and exit the euro as soon as possible. (Keep in mind this outcome is one of many possibilities) That's a process that will take place over a series of weeks and months, not instantaneously. And even assuming that's the end result, there will be all sorts of feints, brinksmanship, negotiations and false solutions before then.
A second important difference between Lehman and Greece — aside from the fact that Lehman had more debt outstanding than Greece has — is the relative component of surprise. Lehman was thought to be a safe investment in the months before its collapse. In fact, its debt still carried in investment-grade rating when it went bust. That's part of what made the fallout so toxic. If Lehman, heretofore thought to be a safe harbor in a storm, wasn't safe, then who else was? But nobody has thought Greece is a safe place to invest for years. Even after the bailouts and the debt write-downs, Greece's bonds trade at highly distressed levels. How many conservative savers and companies do you know that have their money in funds that contain Greek bonds? To a large degree, markets and investors have been discounting and anticipating the failure of Greece's government to meet its financial obligations.
That's not to suggest that we should shrug off an election result that promises a Grexit sooner rather than later. Or that we should have great faith that a negative market reaction to the election results will finally spur Europe's policymakers to get their act together. Recent evidence suggests otherwise. And that highlights another important difference between the Lehman Brothers and Greece situations. When all hell broke loose in the U.S. and global markets in 2008, the American entities charged with stopping the panic — the White House, the Treasury Department, the Federal Reserve, and even Congress — proved they were able to take decisive panic-halting action in the space of a few weeks. Europe's political, financial and monetary leadership has displayed no such ability.
Daniel Gross is economics editor at Yahoo! Finance.
Follow him on Twitter @grossdm; email him at firstname.lastname@example.org.
- Politics & Government
- Lehman Brothers