US fears a European sequel to Lehman Brothers

Another week, yet another wave of Greek drama. But as investors speculate about a possible Greek default, they should take note of a striking split that has opened up between America and Europe.

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.

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 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.

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