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Monday, 18 December 2017

Greece-Lehman comparisons: A load of rubbish

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I wonder if anybody at all can remember how many crucial days there have been in the Greek saga but I suppose the one coming up is – if there were only one – the most important. It is easy for us who do not face what the Greek people are facing to expect parliament to face up to the inevitable and vote through the austerity package. However…

The ruling PASOC party is, in full, the Panhellenic Socialist Party and many of its representatives come from a hard-left tradition. For them to vote against their natural political instincts and against the mandate which their constituents gave them is a hugely tough call and one that not all will be able to follow. Although Prime Minister Papandreou and his attack dog of a Finance Minister Venizelos have promised to deliver a “yes” vote, there will be a significant chewing of fingernails until the final votes are counted, even though I’d expect – as if by magic – enough opposition MPs will vote “yes” to compensate for the Socialists who vote “no”.

Anthony Peters, SwissInvest Strategist

Anthony Peters, SwissInvest Strategist

But what then? Will it be a case of: “Would the last businessman leaving the country please switch off the lights”?

Although markets have been merrily marking Greek bonds lower and lower, there is nothing in the broader asset pricing which would take account of the fall-out of a full default by the country. But then again, how could there be? The name of the much lamented Lehman Brothers keeps getting hauled out of the trash can and held up as a possible scenario for how markets might react in the event of a sovereign Greek default. What a load of rubbish!

Lehman was a victim of the fear which spread around a widening appreciation that securitisation had not only dispersed risk but had rendered it completely opaque. Not only were the regulatory authorities no longer capable of tracking where risk was, in more than enough cases, the holders themselves didn’t have a clue what risk they had strapped on in order to get paid Libor +35bp for Triple-A rated assets.

Lehman also proved that lending based on correlation modelling is a very silly thing to do and I am still deeply concerned that not enough of the right lessons were learnt at the time. Lehman, pre and post default, was about not knowing where the bodies were buried. The sovereign debt crisis is much more about us knowing exactly where the bodies are to be found and not the other way around. At risk of sounding like a cracked record, markets make a living out of trading in known unknowns but fear the emergence of unknown unknowns. The sovereign debt crisis, Greece included, is unlikely to throw up too many of those.

All the while, the argument goes, that if Greece goes, it takes the banking system with it. Would it not be much cheaper all around to let the sovereign entity default and to use the bail-out pot to salvage the banking system?

TAKING A POP AT PIECH

Meanwhile, I understand the the European competition authorities have put a brake on VW’s lightening take-over of MAN as Ferdinand Piech attempted to stuff the board with his own VW representatives. Piech does not like people telling him what to do or what not to do and I salute the people in Brussels for taking him on. They may be brave; they may be foolhardy - what is certain is that, by the time this is played out, I don’t rate their chances of coming much better than second.

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