Could Greece be the next Lehman Brothers? Yes – and potentially even worse

[CHIMO]

It was less than three years ago that the failure of Lehman Brothers sent tremors through the global financial system, threatening the existence of every major bank and triggering the most severe economic crisis since the Great Depression. As Europe's policy elite met for fresh crisis talks today, the dark fear that haunted everyone around the table was this: if the bankruptcy of a middling-sized Wall Street investment bank with no retail customers could have such dire consequences, what would happen if the Greeks decide they have had enough and renege on their debts?

Could Greece, in other words, be the new Lehmans? Given the structure of modern financial markets, with their chains of derivative trades and their pyramids of debt, there is only one answer. Greece could certainly be the next Lehmans. The likelihood that a Greek default would pose a threat to the future of the eurozone as well as to the health of the world economy means it has the potential to be worse than Lehmans. Much worse.

Given that gloomy prognosis, the European Union and the currently rudderless International Monetary Fund know something has to be done but are not quite sure what.

To be fair, it's a tough one. A single currency that involved a hard core of European countries that were broadly similar in terms of economic development and industrial structure might just have worked. Bolting together a group of 17 disparate economies with different levels of productivity growth, different languages and different business cultures was an accident waiting to happen, and so it has proved.

http://www.guardian.co.uk/commentisfree/2011/may/17/greece-debt-crisis-lehman-brothers

[dkf]

1. Greece Default Risk Increasing Since Arrest of Strauss-Kahn, El-Erian Says

The probability of Greece defaulting or restructuring its debt has increased since the arrest of International Monetary Fund head Dominique Strauss-Kahn, Pacific Investment Management Co.’s Mohamed El-Erian said.

“Don’t underestimate how important Dominique Strauss-Kahn was in coordinating action” among European nations, El-Erian, the chief executive officer of Pimco, said in a Bloomberg Television interview on “In the Loop” with Betty Liu. “It’s the worst possible time to lose your general. You need the IMF to coordinate this global healing.”

European finance ministers for the first time have raised the possibility of talks with bondholders over extending Greece’s debt-repayment schedule, saying that last year’s 110 billion-euro ($156 billion) rescue has failed to restore the country to financial health. Europe would consider “reprofiling” Greek bond maturities as part of a package including stepped-up sales of state assets and deeper spending cuts, Luxembourg Prime Minister Jean-Claude Juncker said late yesterday.

http://www.bloomberg.com/news/2011-05-17/greece-default-risk-increasing-since-arrest-of-strauss-kahn-el-erian-says.html

[Demeter]

2. Why Stop There? If the Tea Party Has Its Way, the USA will Be #1 in yet another category

Biggest default ever.

[Stuttgart77]

3. What happens when Greece defaults. Here are a few things:

* Every bank in Greece will instantly go insolvent.
* The Greek government will nationalise every bank in Greece.
* The Greek government will forbid withdrawals from Greek banks.
* To prevent Greek depositors from rioting on the streets, Argentina-2002-style (when the Argentinian president had to flee by helicopter from the roof of the presidential palace to evade a mob of such depositors), the Greek government will declare a curfew, perhaps even general martial law.
* Greece will redenominate all its debts into “New Drachmas” or whatever it calls the new currency (this is a classic ploy of countries defaulting)
* The New Drachma will devalue by some 30-70 per cent (probably around 50 per cent, though perhaps more), effectively defaulting 0n 50 per cent or more of all Greek euro-denominated debts.
* The Irish will, within a few days, walk away from the debts of its banking system.
* The Portuguese government will wait to see whether there is chaos in Greece before deciding whether to default in turn.
* A number of French and German banks will make sufficient losses that they no longer meet regulatory capital adequacy requirements.
* The European Central Bank will become insolvent, given its very high exposure to Greek government debt, and to Greek banking sector and Irish banking sector debt.
* The French and German governments will meet to decide whether (a) to recapitalise the ECB, or (b) to allow the ECB to print money to restore its solvency. (Because the ECB has relatively little foreign currency-denominated exposure, it could in principle print its way out, but this is forbidden by its founding charter. On the other hand, the EU Treaty explicitly, and in terms, forbids the form of bailouts used for Greece, Portugal and Ireland, but a little thing like their being blatantly illegal hasn’t prevented that from happening, so it’s not intrinsically obvious that its being illegal for the ECB to print its way out will prove much of a hurdle.)
* They will recapitalise, and recapitalise their own banks, but declare an end to all bailouts.
* There will be carnage in the market for Spanish banking sector bonds, as bondholders anticipate imposed debt-equity swaps.
* This assumption will prove justified, as the Spaniards choose to over-ride the structure of current bond contracts in the Spanish banking sector, recapitalising a number of banks via debt-equity swaps.
* Bondholders will take the Spanish Banking Sector to the European Court of Human Rights (and probably other courts, also), claiming violations of property rights. These cases won’t be heard for years. By the time they are finally heard, no-one will care.
* Attention will turn to the British banks. Then we shall see…

http://www.zerohedge.com/article/here-what-happens-after-greece-defaults

[bemildred]

4. You know at this point I say "Bring it".

We need to get rid of these clowns (DSK is a perfect example) and they are obviously not going to change themselves or change their methods and economic dogmas either.

[fasttense]

5. Why does it have to be default??? Why can't Greece simply restructure their loans???

Trump was able to do it, over and over again. Many a corporation and the uber rich get breaks on their loans. Why can't Greece? It seems to me all we hear about is 2 rather dire choices. Default (and the end of all time) or pay the debt 100% plus a huge amount of interest. Seems to me there is a middle road but banksters and RepubliCONS don't want to discuss it.

[golfguru]

6. I was in Greece recently

Speaking of inflation/deflation and just ripping a country apart, I was in Athens recently. Imagine a country in an economic recession/depression where unemployment is rising, the stock market is down 80%, blah blah blah. Housing down, car sales down, consumer spending plummeting, blah blah blah. You would think they'd be experiencing some sort of deflationary depression, and for some things, that's true.

But many basic supermarket items remain more expensive than richer European countries like Germany or Austria...I'm not sure if it's due to poor competition or government protection or what. I'm not sure food prices in restaurants have come down (they are just empty and closing). Coffees are still 4 and 5 euros in random cafes. But gasoline is the real kick in the balls.

Because of new austerity taxes, gasoline (basic unleaded) was 1.70 euros per liter and rising. At 3.9 liters per gallon, that is 6.63 euros per gallon. At $1.41/euro, that is $9.35 PER GALLON.

Don't forget this is a country with lower wages/stock market wealth than the US. Imagine the US in an environment far worse than February 2009 with $9-10 gasoline and way higher unemployment and a flood of illegal immigrants (who enter through Greece on their way to other EU countries and often get stuck there). In many ways, it's a miracle Greek society has held together as well as it has.

I'm not sure how much longer they can take this though....I got the feeling they're getting closer on a social level to just giving up, defaulting, and starting over. The math just doesn't work, there is no hope, no faith in politicians/banks/each other, no anything to save the day.

They are going to pass through the Argentina phase pretty soon...about that I'm almost certain...it's just a question of what happens after that chaotic phase. Do they wake up and change (they are smart and educated people after all) or do they transition toward third-world Latin American 1980s hell instead? It will be very interesting to watch, especially because Greece is actually less indebted as a country (including banks/consumers/companies) than many neighbors.