Financial Times
July 10, 2011
Most of the time political leaders will speak soothing, meaningless platitudes. These days, though, the euro area leaders, and those in their entourages, are speaking frightening, meaningless platitudes.
For example, it is threatened, a default on Greek state debt, or the country’s departure from the eurozone, will lead to a “Lehman” like crisis, or one that will “dwarf” Lehman. The idea of this nonsense, it seems, is to corral the doubters into agreeing to the most recent, half-thought through, workout or “rescue” plan the speaker is sponsoring.
Where to start? The Lehman crisis was a consequence of the market’s surprise on finding out the US authorities would allow a major banking counterparty to default. For that, in part, we can blame the Fed-midwifed Bear Stearns wind-down a few months earlier.
But few in the bond or banking markets would be shocked by a Greek default. Outside the fantasy world of bank held-to-maturity accounts and the European Central Bank’s solvency assumptions, Greek state bonds have already been marked down by close to half their face value. That discounts most of the likely loss, in contrast to the price on Lehman risk a couple of months before its failure.
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