Stephen Foley: Greece is not Europe's Lehman Brothers

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The Independent Online

US Outlook: There is a cliché emerging on this side of the Atlantic, which we should nip in the bud, that the threatened Greek government debt default is "Europe's Lehman Brothers". I'm as prone to the imperfect analogy as the next reporter, but raising unnecessary alarm in volatile financial markets will not do. It is also an insult to history.

The unexpected bankruptcy of Lehman Brothers in September 2008 pulled a significant cog out of the machinery of international banking, stopping that machine altogether.

Lehman was a major trader of credit-default swaps and other complex, legally-opaque and never-before stress-tested instruments. Its disappearance meant lots of other banks suddenly found themselves without a counterparty. It held billions of dollars of assets on behalf of hedge funds and other clients, who found that moneysuddenly inaccessible. None of this applies to Greece, which is "just" an issuer of debt.

Since it is now impossible to see the shrinking economy of Greece generating enough in tax revenue to pay its debts, only the timing and scale of its restructuring is unknown. The Fed's Ben Bernanke fanned a few flames this week when he said "a disorderly default" in the eurozone "would no doubt roil financial markets globally", and he highlighted how US money market funds hold considerable commercial paper from European banks, who face potentially billions of dollars in losses if Greece stops paying.

Except that disorderly in this case is not likely to mean a midnight bankruptcy of Greece, Lehman-style, but a political drama played out over weeks, beginning with a refusal by the Greek parliament to submit to further self-defeating austerity. That might not look particularly orderly compared to kicking matters into next year, but it ought to give everyone time to fess up to their exposures and for central banks to provide any emergency liquidity needed.

Defaults by issuers of debt, even governments, are of course not uncommon. The International Swaps and Derivatives Association has procedures in place to quickly settle the swaps written on sovereign debt, as it did for all the unprecedentedly large banking failures in the US over the crisis.

Barclays presented its latest quarterly outlook in New York this week, and the investment bank's research chief Larry Kantor made the point that while financial markets may well drop sharply, there is no likelihood of a crash. (Barclays' accompanying publication for investors was called Stay the Course, though it should have been Keep Calm and Carry On).

Crashes, Mr Kantor says, come after periods of financial market exuberance and complacency. Investors have been gaming Greek default scenarios for a very long time now, and rarely have political machinations in Berlin and Athens been so closely examined by traders in New York and Chicago.

The most disastrous consequence of Lehman Brothers' failure was that, all of a sudden, almost nothing was certain. That is what causes panic.

Ironically, by contrast a restructuring of Greece's debt might just do more than anything to end the dangerous uncertainty that exists in financial markets right now.

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