Well, Mebbe Larry, Mebbe

Could Greece, in other words, be the new Lehmans? Given the structure of modern financial markets, with their chains of derivative trades and their pyramids of debt, there is only one answer. Greece could certainly be the next Lehmans. The likelihood that a Greek default would pose a threat to the future of the eurozone as well as to the health of the world economy means it has the potential to be worse than Lehmans. Much worse.

I\’m actually deeply unconvinced of this.

Total outstanding Greek debt is of the order of €350 billion.

CDS interest is pretty small, around 10% of that (if I remember correctly) or €40 billion.

Now, if Greece defaults or restructures, yes, there will be a number of banks very hard hit. And it\’s almost certainly better from that one point of view that Greece defaults later rather than sooner (everyone, but everyone, is frantically piling up loss provisions against what they\’re certain will happen at some time. The larger those provisions are when it happens the less effect its happening will have).

Again from memory, the Lehman Brothers nominal CDS exposure was $400 billion all on its ownsome. That\’s not even counting whatever they were doing in other markets.

And it wasn\’t even Lehman going bust that crashed everyone else. It was that someone went bust so everyone started to have a damn good look at everyone else. The losses from Lehman didn\’t bankrupt RBS, or HBOS, or BoA or any of the others. It was that a) Hey, they\’re letting people go bust! and b) What has everyone else been hiding? that did.

Greece defaulting or restructuring just isn\’t new information: OK, the actual act will be new information but the markets are pretty much figuring that in already. That\’s why they\’ve got to pay 25% interest on two year bonds at present.

Greece going down will be very important for the euro, the eurozone, the European Project. But that\’s not the same thing at all as it being all that important to the financial markets.

For they do discount the future you know, however imperfectly.

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