Greek Default: The Lehman-Like Day After

Wall Street Journal
June 14, 2011

By now, the question of whether or not Greece will default seems almost moot. Certainly, financial markets have largely priced in the risk. Unfortunately, that doesn’t necessarily mean they have priced in the after-effects yet, and those could be big.

Lena Komileva, head of G10 strategy at Brown Brothers Harriman, has a note out today titled “The Day After Greece Defaults.” In it, she warns of the knock-on effects of a messy Greek default. It sounds an awful lot like what happened after the Lehman Brothers default:

Recent market action suggests that investors have largely prepared for the eventual certainty of a Greek credit event, but the markets remain vulnerable to a broader contagion from a euro zone government default across sovereigns, financial sector and risk assets.


The real economic cost…is not so much the direct cost of Greek default but the uncertainty surrounding broader financial stability the day after Greece defaults.


The immediate risk that a Greek credit event could compromise stabilization processes elsewhere. An unmanaged default… would be almost certain to destabilize stabilization plans elsewhere. Portugal and Ireland could yet succumb to disorderly processes…


[F]inancial convergence will come under threat. This means increased volatility in government bond yields and in the euro which will have a direct knock on effect on the European banking system as a whole and on global capital markets. These shocks would likely be amplified through forced asset sales to plug in [bank] liquidity and capital ratios, particularly as Greek default will likely halt full access for the most vulnerable banks to ECB refinancing. The effects on the ECB’s own balance sheet – any unhedged asset exposure to default-rated peripheral credit – would have a further liquidity draining effect on base money supply and market liquidity.

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