Why You Shouldn't Fear the Markets' Next "Lehman Moment"
The financial press is enjoying itself.
One headline says the atmosphere is “toxic.” Another warns of “contagion.”
“Politicians fiddle while Athens burns,” says The Wall Street Journal.
They all agree: Europe is going to Hell…just as soon as it can find a handcart!
But you remember our comments yesterday? Got a catastrophe? Great!
The authorities have tried to avoid disaster. They’ve done a good job of it. That is, they’ve avoided small disasters. And they’ve laid the foundation for a big one. So, bring it on!
According to one press report, “Europe is waiting for its Lehman moment.” Get it? It’s that moment when all Hell seems to break loose in the financial markets – like September ’08, after Lehman Bros went broke. Bloomberg:
The euro lost more than 2 percent against the dollar in the past two days and the cost of protecting corporate bonds soared to the highest level since January, with credit-default swaps anticipating about a 78 percent chance that Greece won’t pay its debts. Equities declined around the world, while a measure of fear in fixed-income markets jumped the most since November.
On the streets of Athens, riot police armed with clubs swing at protesters, also armed with clubs. “Greece was plunged into political turmoil…” began the report in The Financial Times.
But what is really going on?
Greece, a small country with a small GDP and no oil…whose strategic export is olives…and whose last real military victory was the Battle of Jhelum in 326 BC, in which Alexander the Great defeated an Indian Rajah named Porus. But Greece is also as deep in debt as the US. But unlike the US, lenders don’t want to lend Greece money. They’ve read the history books. They know what happens when you lend Greeks money. You don’t get it back.
On the other hand, they also know that the European Central Bank and the financial authorities worldwide are afraid of a “Lehman moment.” They fear disaster. They hate catastrophes. They think their job descriptions include avoiding calamities of all sorts.
Investors don’t know quite what to think. The danger is high. But there are rewards too. Greek debt with a 3-year maturity is yielding 28%. If the authorities pull off another bailout, speculators stand to make a lot of money on the long side of Greek debt.
But as we said earlier, it is because officials are so good at avoiding calamities that we find ourselves confronted with so many of them now. If they’d let Greece go broke 3 years ago, the problem would be behind us instead of in front of us.
Avoiding disasters hasn’t worked. At least, not avoiding debt disasters. No matter what tricks the authorities do – monetary, fiscal, or unconventional – the debt is still there. And since all those tricks cost money…it gets bigger and bigger.
So how about this: Give disaster a chance to show its stuff. Let calamity have a go at the problem. Let’s all put our hands together and welcome catastrophe.
It’s coming, whether we like it or not.
So why not like it? Look, who really cares if a few big banks go broke? Who cares if Greece, Portugal and Spain – if it comes to that – are forced out of the EU? Who cares if the bankers don’t get their bonuses…or the speculators don’t get their pay-offs…or pompous officials don’t get to claim they ‘saved the world economy’?
Of course, we don’t really know what would happen if disaster were allowed to settle up things on its own. If the EU doesn’t come through with another bailout, Greek banks – including its central bank – will be insolvent. And the European Central Bank may be insolvent too. It has an outstanding loan for $49 billion to Greece. It has a lot of other debt on its books too – from Spain, Portugal and Ireland. What that debt is worth today, you can find out by looking in the financial pages. What it will be worth after Greece defaults is unknown…but surely a lot less. And when the losses are toted up, they are likely to be more than the ECB’s capital.
Then, the scheisse will really hit the fan.
What will happen? No one does. But we want to find out.