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|A new Lehman looms. Its name is Greece|
The Times - February 20th 2012
There is something spooky about the economic and financial scene on both sides of the
The results of that decision, taken less than four years ago, sit there for all to see in the unemployment rolls and hugely expanded public debts in both Europe and
After all, perhaps the Germans are saying to themselves, things in Europe are a bit grim—this year the eurozone will be in recession—but they are not really disastrous. Only in
Stockmarkets are behaving as if a new dawn has broken. In
People have been talking about an impending Greek default for about two years now, and it hasn’t happened. Yes, the Greek economy is imploding, with its GDP falling by 7% last year and perhaps 4% or more this year, but these are falls from numbers that were as artificial as were bankers’ profits from derivatives holdings and sub-prime mortgages.
Yes, buildings burn and opposition politicians mumble about renegotiating rescue deals after they win the general election in April, but they soon back down. So some dangerous complacency is creeping in. It will always be alright on the night, runs the thinking, once the fires have been put out.
The brinkmanship game is being played on both sides, with the Greek government using fears of default to wring a deal out of private bondholders and some favourable treatment by the European Central Bank of its own holdings of Greek debt, but most of all the Germans and other northern creditors are using it to force the Greeks into tougher reforms.
On the face of it, this makes sense.
But behind that face lies the Lehman danger, with a nasty twist. The pressure on
There will, in other words, still be a lot of contagion, of an unpredictable sort, just as there was when Lehman went down. The nasty twist is that this risk is not going to go away, even if each round of the brinkmanship game goes well. Greece’s public debt, even if the bail-out package goes ahead and private lenders accept the losses they are being offered, is still variously forecast as being between 120-130% of GDP in 2020, and those figures depend on an economic recovery.
Meanwhile, the other southern European debtors’ situation is not going to improve quickly. Austerity programmes look sure to lengthen and deepen their recessions, so deeper recessions may well send their debt totals rising rather than falling.
There is no easy way out of this. But the Lehman experience surely teaches us that hoping for the best is not a good approach. The right way to deal with
A managed default and exit from the currency would be the best way to avoid catastrophic contagion of the Lehman sort. There would still be some contagion, but with a clear plan, an aid package from
The euro would be changed forever by a Greek exit. Adoption of the currency would no longer be an irrevocable act. Membership would become contingent on performance and behaviour, and speculation would always be present about who might leave next. Yet isn’t that what the Germans really want? The discipline of rules about deficits and debts needs to be reinforced by the discipline of financial markets.
The original design of the currency, in the 1992 Maastricht Treaty and then its launch in 1999, relied on the principle that no country could be bailed out, and that sovereign borrowing would be constrained by market perceptions of members’ credit-worthiness. Unless