Greece is Not Lehman

Recently, there have been quite a few comparisons between a Greek default and the Lehman Brothers bankruptcy -- “Is Greece the 'next Lehman Brothers'?”, “Greek Restructuring Would Be 'Lehman Moment,' MIT's Johnson Says” and "Could Greece be the next Lehman Brothers? Yes - and potentially even worse" to cite a few. The comparisons, while tempting, are exaggerated and overstate Greece’s role in the European Union and more importantly in the global financial system. In short, it is our opinion that Greece’s debt issues alone do not pose the same threat that Lehman Brothers did in 2008. 

As such, while a Greek default would be extremely disruptive, the disruptive effect is not as much due to contagion and the spread of systemic risk, but more due to the disruption of the status quo—USD down / risk on. A Greek default will obviously be hugely painful, placing stress on EU relations, reducing confidence in the euro and generally decreasing risk appetite; however an all out freeze of the global financial system and movement of capital as experienced before, during and after Lehman’s collapse seems out of the question at this time. This is best illustrated by the Ted Spread, which still remains well within normal levels. See Figure 1 below.

Figure 1: The Ted Spread “represents the change between the three-month LIBOR rate and the three-month rate for U.S. Treasury bills. It is used to measure the amount of pressure on the credit markets. Generally, the spread has stayed under 50 basis points. The bigger the difference between the two, the more worry there is about the credit markets. Economists will look at this to determine how risk-averse banks and investors really are.” Source: Investopedia; Data Source: Federal Reserve

Lehman Brothers and the other now reincarnated investment banks were the pistons, gears and engine of the financial system. All were interlinked and as we ultimately learned the failure of one meant the virtual shutdown of all. The crisis of 2007/08, which I unfortunately had a front seat for as an ETF trader at Lehman, was a solvency crisis for investment banks and many commercial banks; it was a bubble bursting; it was a crisis of confidence; and importantly it was a liquidity crisis on a worldwide scale—money literally stopped moving. The spike in the TED Spread in 2007-2009 shows how capital movement virtually froze.

On the other hand, Greece and most of the periphery European countries, even the larger ones, are merely passengers of the financial system. They are not integral components to the continued viability and fluidity of the financial system. Spreads on Greek and some periphery European country debt have exploded relative to German Bunds, and yet we are not seeing the same general distrust amongst global banks that was so pervasive during the credit crisis.

Bottom Line: In some ways Greece’s relationship to Europe is like a tangled ball of yarn. Untangling the mess without serious disruption is possible but it will be difficult and at times painful. On the other hand, Lehman Brother’s relationship to the global financial system was somewhere between tangled yarn and a scrambled egg—maybe a tangled yarn dipped in egg. Untangling it was nearly impossible without serious blood, sweat and tears and despite best efforts by all everyone was left with a horrible mess on their hands. With that said, given the fragility of the global economic system, the possibility of a severe market downturn cannot completely be ruled out. As such, we are watching for warning signs that the above thesis is wrong—TED Spreads, Bund/Treasuries spreads, equity market volatility and credit spreads, among other things. So far all appear to be well within normal expectations.

Prepare for volatility and downward corrections but not outright collapse.