April 23, 2015 6:03 pm
Gillian Tett
Policy makers worry eurozone officials are too optimistic about dealing with a potential Grexit
©Reuters
Following Lehmna's collapse, US officials learnt a painful lesson about how small shocks can spiral out of control
On the eastern side of the Atlantic, policy makers
are now at pains to suggest that a Greek default, or even a eurozone
exit, would not be disastrous; at last week’s International Monetary Fund
meetings German officials argued that the chance of a Greek exit had
already been priced into the markets, and that shocks could be
contained.
FirstFT is our new essential daily email briefing of the best stories from across the web
But
on the western side of the Atlantic, the mood is not sanguine. Earlier
this week, Jason Furman, chairman of the US Council of Economic
Advisers, publicly warned that
a “Greek exit would not just be bad for the Greek economy, it would be
taking a very large and unnecessary risk with the global economy just
when a lot of things are starting to go right”. In private, US officials
are expressing even more concern.
Why the transatlantic difference? In part, incentives. Countries such
as Germany have spent the past three months fruitlessly negotiating
with the new Greek government, and are now so frustrated they want to
find ways to rationalise taking a hardball stance. The Americans, by
contrast, are one remove away.
But the other factor is Lehman Brothers.
When the broker collapsed
seven years ago, US officials learnt a painful lesson about how small
shocks can spiral out of control. Their European counterparts
experienced that crisis too. But Wall Street traders and Washington
bureaucrats saw contagion spread in a particularly immediate way,
scarring their psyche. And some American officials suspect there are
several key points about that 2008 debacle that could be very pertinent
to Greece.
The first is that even if a risk has been well
analysed — or even anticipated — this does not prevent unintended, nasty
consequences. Think back to 2008. Six months before Lehman Brothers
collapsed, there was a full-blown crisis at Bear Stearns
that left regulators and bankers braced for another financial shock and
scrambling to prepare. On the eve of the Lehman bankruptcy, for
example, regulators were obsessively focused on controlling the risks
posed by credit derivatives.
But in the event, regulators missed a trick: what sparked market
turmoil when Lehman failed was not the credit derivatives contracts, but
a legal issue that had previously been ignored, namely that the UK
bankruptcy code ringfenced investor assets differently from New York’s.A second Lehman lesson is that when one issuer fails, this knocks faith in others too. That is not just because investors start to worry about flaws at other entities, but due to wider policy uncertainty: when Lehman failed, the entire paradigm for finance suddenly seemed unpredictable. Hence the panic surrounding money market funds. And that highlights a third point: political turmoil matters. What really sent global markets into a tailspin in 2008 was that a couple of days after Lehman’s failure, the US Congress initially rejected the bank rescue package that Hank Paulson, then US Treasury secretary, had devised, creating policy uncertainty.
Perhaps those three dangers can be avoided with Greece. Regulators and bankers have spent months studying the financial interconnections around Greece and conducting fire drills for a Greek exit. The health of countries such as Spain and Ireland has dramatically improved, which should (in theory) reduce the contagion threat. And if a Greek default or exit does occur, the rest of the eurozone might produce a unified, coherent political response; or so eurozone officials told their American counterparts at the IMF.
But all three arguments — or hopes — could be too optimistic. For one thing, the sheer opacity of financial institutions still creates plenty of scope for nasty logistical and legal surprises. Greece is certainly not the only country saddled with excessive debt. And thirdly, there is no guarantee that political surprises would end with a Greek exit; as in 2008, it might initially create more policy uncertainty.
Or to put it another way, although eurozone officials insist they can handle the first-order risks of a Greek exit, it is the second-order problems that (quite rightly) worry Americans. Not least because there is a fourth lesson from Lehman Brothers: when a crisis hits, the value of afflicted entities tends to shrivel. The hole in Lehman’s balance sheet became much bigger than anyone imagined. And that is a scary thought to contemplate in relation to any Greek exit scenario — not just for Greece but the entire eurozone.
Related Topics
Please don't cut articles from FT.com and redistribute by email or post to the web.