Greece Debt Restructuring May Spark ‘Lehman Event,’ Reid Says
April 23 (Bloomberg) -- Financial markets face the risk of a seizure similar to when Lehman Brothers Holdings Inc. went bankrupt if Greece restructures its debt to the detriment of investors, Deutsche Bank AG said.
The surge in the cost of insuring the country from default shows traders aren’t convinced Greece will get a full bailout, Jim Reid, head of fundamental strategy at Deutsche Bank, wrote today in a report. A restructuring of Greek’s debt, while unlikely in the short-term, would have “huge ramifications” for global financial markets, he wrote.
“As soon as you set a restructuring template for stressed sovereigns, then you run a huge risk of a Lehman-type event with confidence in other stressed sovereigns evaporating,” including Portugal, Ireland and Spain, Reid wrote. “It’s not just Greece that needs the bail-out, the others need it as a first line of defense.”
Greece is prepared to ask euro-region governments for a bridge loan as $11.3 billion in bonds come due next month and borrowing costs surge to the highest level since 1998. The nation is trying to hammer out terms of a 45 billion-euro ($60 billion) aid package with the European Union and International Monetary Fund.
“A restructuring might be argued to be the best solution in isolation and may be needed longer-term, but we can’t see the authorities being prepared for the consequences of this anytime soon,” Reid wrote. “This situation is coming to a head in a nasty manner.”
Lehman Brothers, once the world’s fourth-biggest investment bank, filed the biggest U.S. bankruptcy on Sept. 15, 2008, sending markets worldwide into a tailspin. Global stocks plunged 40 percent within two months, the once $2.2 trillion U.S. commercial paper market seized up and the extra yield investors demand to own corporate bonds soared to record levels.
Greece is likely to cut or delay payments to bond investors even as the country negotiates a bailout package to help it combat a budget deficit of 13.6 percent of gross domestic product, according to Goldman Sachs Group Inc.
Credit-default swaps on Greece’s bonds climbed 11.5 basis points to 645.5 today, according to CMA DataVision prices.
The bond market has just thrown up on Greece.
Portugal, Spain & Ireland are next.
Then comes England.
The Sovereign Debt crisis in just beginning.
Time to be defensive and buy gold in my view, as bonds, stocks, and fiat currencies become increasingly fragile.