Why A Grexit Would Make Lehman Look Like Childs Play

Tyler Durden's picture

From Peter Tchir of TF Market Advisors

Why A Grexit Would Make Lehman Look Like Childs Play

Maybe I’m wrong, but every time I look at the possibility of a Greek exit right now I see it spiraling out of control and dragging down the entire global economy.  I hear and read the arguments of why it is controllable and they just don’t seem credible.  They either link a Greek devaluation to other devaluations that have little, if anything in common.  They also seem to ignore human nature and how the markets will likely respond.  I think with planning and time, a Greek exit would be manageable but right now it would create chaos, first within Europe and then the globe.

The ECB, EFSF and IMF will take massive losses

The ECB has €50 billion of GGB bonds still on their books.  Those would not get paid at par by Greece if this is an amicable breakup, but this is quickly heading to a pots and pans thrown in the kitchen sort of break-up.  Why would Greece pay the ECB if they feel like the ECB drove them out?  Don’t forget, not for a second, that most of the money Greece now gets goes to pay back the ECB and IMF.  The EFSF is totally out of luck.  The ECB might be able to offer something to a post drachma Greece, but the EFSF offers nothing.  The IMF has more negotiating power, as their direct loans had more protection in the first place and they are likely to provide additional funds post exit, but quite simply Greece won’t be able to pay them in full on existing loans.

With the ECB, EFSF, and IMF all taking big losses, their credibility is hurt.  Worse than that, they have exposure to Portugal, Ireland, Spain and Italy and the markets (if not the politicians) will become very concerned about those exposures.  The IMF may see its alleged firewall crumble before it is ever launched.  The ECB, integral to any plan to protect Europe will have lost credibility and many will question their solvency.  The EFSF will be hung out to dry and immediately the market will attach all their risk to Germany and France, not making people in those countries particularly happy.

Preparation:  The ECB in particular is acting like a profit center.  Does it really need the current coupon it gets on its SMP portfolio?  Does it need to be paid back at original scheduled maturity date?  Paid back at par rather than cost?  The ECB should work proactively with those countries to exchange their bonds for something that doesn’t cause a loss for the ECB but gives the countries a big benefit (maturity extension, rebate of bonds purchased at discount, and much lower coupon).  Whatever message the ECB is trying to send by not doing this seems bizarre to begin with, but insane once you consider the real losses they will take upon a Grexit.  The IMF and EFSF have less flexibility but can cut rates on their loans, as they too don’t need to generate a profit either.  This takes pressure off all of the countries, has no real “cost” to any country, and sets a good tone for proper negotiations of what will happen upon a Grexit down the road.

European Trade Will Decrease Dramatically

Somehow people seem to believe that switching to the Drachma will increase exports for Greece.  That somehow trade will grow.  Just the opposite is likely to occur, and just like bank “runs” this will hit all the periphery countries immediately.

The standard image is of companies just waiting to buy new “cheaper” drachma goods from Greece.  That just doesn’t reflect the reality of modern trade.  Most companies have existing suppliers and contracts, so they may not even be able to switch to Greek suppliers in the short run.  But the key word there is “contracts”.  Companies depend on contracts.  Do you really think companies will be busy trying to sign new deals with Greece, a country that just left a currency union, and only recently retroactively changed its laws for bondholders?  Or do you think lawyers will be figuring out what it means for any existing business, not just with Greece but with all other periphery countries?

It will mean the latter.  Companies will become extremely concerned with doing business with anyone who might leave the Euro.  They will want to know what happens to their business arrangements.  They will not provide any credit in any form to businesses in those countries.  While someone might be some olives because they are now cheap, no company is about to buy components for bigger projects from Greece.  If the earthquake in Japan taught manufacturers anything, it is how critical their supply chain is.  You really think many CEO’s will take the risk of doing business in a country with an uncertain currency, laws that have been “bent” to serve the country?  No, and that is the optimistic view, as it doesn’t include the risk that Greece faces major disruptions due to the high cost of things like, um, oil.  Greek companies themselves will likely be mired in confusion over what the Grexit does for them.

The problem will hit Greece the hardest, but it won’t be isolated to Greece.  If you think there is a real risk that Spain or Italy head down the same path, you will be reluctant to work with them.  You may even be afraid of what exposure they have to Greek suppliers. 

Preparation:  Time.  Contracts need to be reviewed.  Changes need to be made that deal with the consequences.  Alternative methods of trade finance need to be developed.  Most importantly, Spain and Italy have to be doing well enough that the risk of them leaving is virtually zero.  Getting Spain and Italy on a stable footing is a critical part of any plan to have Greece leave.

Other Devaluing Countries have been Resource Rich

While some countries have devalued successfully, they are typically resource rich.  Not only do the countries typically have a lot of natural resources, with oil at the top of the list, those industries are typically government controlled.  So while the economy adjusts to the devaluation, the governments typically impose restrictions on not just capital but on natural resources.
Being able to subsidize individuals and company with raw materials at below market rates has been part of a typical EM country’s devaluation program.  Greece is no shape to do that.  Greece has to import virtually all of its energy needs.  They are at the mercy of the markets and a devalued drachma is not going to help them.  This is a huge difference that so far has been overlooked.  Without its own supply of critical resources, Greece will be forced to spend inordinate amounts of money to keep the economy merely functioning.  That will offset the alleged benefits of increased trade, with I believe in the near term are overstated to begin with.

Preparation:  Stockpiling.  Greece needs to build supplies of essential raw materials.  It will eat up additional money, but better to buy in Euros than Drachma.  Also, if the conversion can be done smoothly, maybe you only see a 10%-25% devaluation, making the risk lower and far better than some estimates of an immediate 50%-75% drop in value. 

Other Devaluing Countries weren’t part of a Fragile Currency Union

It ultimately keeps coming back to Spain and Italy.  If every other member of the EU was doing fine, the impact of a Grexit would be much lower.  The impact on the ECB, EFSF, and IMF would be bad, but tolerable if they weren’t immediately going to take losses on Portugal and Ireland, and have to face potential consequences from Spain and Italy.

Trade with Greece would drop, but other companies wouldn’t be that concerned about continuing to do business with Spain and Italy on standard terms.  While they are weak, prudent businesses will treat them more like Greece than might be warranted, but companies will be careful.  What executive would want to lose money on a Spanish business venture when everyone will say in hindsight it should have been obvious they were also going to fail.

The horrible state of Portugal and Ireland, the weakened state of Spain and Italy, the ignored but dubious state of Cyprus, Slovakia and other small members make the ramifications of one country leaving that much more difficult to deal with.  If Greece was truly an isolated case, then fine, but it isn’t.   The countries are all too similar, all too tied to the ECB and EFSF, and ultimately those connections are what making a Grexit a far bigger deal than it would be otherwise.

Preparation:  Determining which countries need to leave will be key.  If Portugal really needs to leave as well, it should be done in conjunction with leaving.  Spain and Italy have to be made to appear to be “rock solid” members of the EU.  The contagion risk of doing anything while Spain and Italy are so weak is just too big.  If they ultimately have to leave, then I think the planning and preparation is that much harder.

Currency Runs

This is already hitting.  It isn’t just bank runs, it is the willingness of companies to do business with these countries.  It is showing up in the bond markets.  The activity has been frantic with huge amounts of money flowing out of countries that aren’t just weak, but out of those with perceived currency risk.

I don’t think anyone truly believes Belgium is a great credit.  The Belgium 5 year bonds traded at 5.6% in November of last year.  They are currently at 1.8%.  This is Belgium, the home of Dexia, the land without a government, and yet they are trading much better than other members of the November 5% club.  That is at least in part because people believe they will stay in the “good” currency union. 

This currency risk is visibly playing havoc with the bond markets, and I suspect it is playing almost as much havoc in corporate board rooms we just don’t get to witness it on a daily and immediate basis.

This currency run is more than just a run on bank deposits.  It is a run on doing business within countries.  It’s an inability to get trade credit which is necessary to be competitive.  It’s deals that aren’t getting closed because whether admitted to or not, the companies are nervous about the future.

The problem with “runs” is that they become emotional and self-fulfilling.  It is relatively easy to take a stab at the solvency of a bank.  The data isn’t great, but at some level you can convince yourself BBVA is safe.  They have enough capital, enough support, etc., that their solvency risk is manageable.  Spanish branches of Deutsche Bank are even easier to get comfortable with from a solvency perspective. Bankia, right now appears to be teetering on insolvency, but with recapitalization, the depositors can get comfortable again.  Addressing solvency is painful because it will involve the governments taking stakes in banks, but it is relatively solvable.  Dealing with conversion risk is much harder.  If my money sits in a deposit account at BBVA, Bankia, or Spanish branch of DB, the currency conversion risk is the same.  The only way to protect myself is to take the money out.  It isn’t quite the same for companies doing business, but it isn’t that dissimilar.

Preparation:  Getting the bank recapitalizations done would be helpful.  Eliminating the immediate solvency risk would help.  One of the many EU institutions (EBRD? EIB?) needs to come up with some new form of trade credit support.  Not just for Greece, but for all of the at risk countries.  Ultimately, getting Spain and Italy back from the brink is key, but finalizing the much talked about, little done, bank recapitalizations and ensuring the availability of trade credit would start to calm the tension.

Decoupling is a Myth

As we saw after Lehman and then to a lesser extent after the earthquake in Japan global trade is very fragile.  A Grexit would immediately affect the entire periphery.  It would disrupt supply chains (like Japan) and impact credit (like Lehman).  From there it quickly spreads to the rest of Europe and the U.S. and China.  Some of the contagion will be over concerns about the banks in those countries and their exposures, which won’t be calmed as easily by an ECB and IMF with huge volumes of bad loans on their books.  It will also occur because their customers won’t be buying their goods.

A butterfly flapping its wings may or may not cause a rainstorm in New York, but a Grexit will make people look at the post Lehman collapse as the good old days.

A Grexit is So Bad That it Won’t Happen

Again, I fail to see the optimistic case of a Grexit.  Every time I try and play through scenarios where the IMF and ECB come to the rescue, it seems like it will be far too little and far too late.  Maybe the powers that be are smarter and have figured out a plan, but given their track record, that is hard to believe.  The more they look at the situation, the more I am convinced they will see not only how potentially awful the situation becomes, but that the cost to avoiding it right now are relatively small, and with proper preparation a Grexit can be managed down the road.

I still think we should have had more Lehman moments.  In fact, not letting the AIG moment occur was probably a bigger mistake, but most politicians have taken the lesson never to let a “Lehman” happen again, so once they see that Greece is Lehman on steroids, they will back down and figure out enough to give Europe and the markets a solid kick.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
veyron's picture

A wand will be waved and all will be saved ...

CrashisOptimistic's picture

Very possible.

People evaluate all these things as if rules apply.  They don't.

As for: The ECB, EFSF and IMF will take massive losses 

No.  There is no reason this must be so.  Why "take" the loss?  If Greece doesn't pay, continue to bill them.  Put a surcharge on their imports and collect that way.

Argentina is still cut off from credit markets and is an ongoing basket case.  They ARE negotiating to try to repay debt.  So would Greece.

The point being sovereign debt does not expunge.  It's forever.

Surly Bear's picture


I'm praying for the end of time. It's all that I can do. Praying for the end of time, so I can end my time with you!!!

~Meat Loaf


lineskis's picture

Will TPTB be keen on renegotiating Greek's "bailout" terms (be it now or accepting late and incomplete payments)?

Yes -> Greek stays and all is "fine", as long as the ECB gives Greece some money. Hello CTRL+P! But how long will they keep printing?

No -> Greece cannot honor the "bailout" terms anyway. Greece will have no choice but to leave the EU to fund the basic government needs in the short/medium term.

So as long the CTRL+P option is cheaper than a Grexit, Grece will stay within the EU. But as soon as it's deemed too costly, put your helmet on and kiss Greece good bye! '.'

LoneCapitalist's picture

Kinda like my neighbor who owes me $50. Ill never see it , but hey, at least he still owes me.

Amish Hacker's picture

He would rather owe it to you than cheat you out of it.

LuKOsro's picture

I owe it to myself to see that nobody owes me anything.

Marco's picture

Sovereign debt denominated in a currency you can't print is "forever" ... although if it's denominated in dollars bond holders will eventually agree to a restructuring any way, they know where the dollar is heading as well as the rest of us.

fijisailor's picture

Better check your sources on Argentina.  Despite no credit access the country is doing remarkably well.

brunoaa's picture

Right now in Argentina they use dogs at the frontier to check if you are carrying dollars. The official rate for the peso is 4.5 (if the ministry of finance authorize you to buy dollars which is unlikely) and 6 on the black market. I live in Uruguay and I can tell you our Argentinian neighbour are not doing so well.

mick_richfield's picture

A couple biscuits in the right places, and those dogs will look the other way.

Buckaroo Banzai's picture

You are high on crack. Argentina is a full-fledged economic disaster.

ElvisDog's picture

So true about the rules thing. It's like whenever I read an article that states "when foreign creditors refuse to buy our bonds and interest rates rise". Except, it doesn't seem to work that way. In my opinion, as long as the politicians of the periphery countries stay in line with the ECB/EU/IMF program the game will continue. If Syriza wins the Greek elections, and if they stay true to their campaign promises things might change, but counting on more than one "if" always makes me skeptical.

JeffB's picture

There are apparently no mechanisms to force Greece or any other country out of the EU. Why couldn't they just default/negotiate some haircuts they could live with long term and stay in the EU?

If CDS insurance kicks in, do the CDS "insurors" have subrogation rights to try and collect outstanding bonds they've paid on?

They'd still have to figure out some way to get the government and the citizenry to live within their means, but that's going to have to happen one way or another no matter what they do. I suppose it would be easier to have the IMF doing the dictating so they can blame outside forces rather than the politicians having to make the hard decisions and take the heat, though.

gorillaonyourback's picture

go read the history of argentina before you make silly statements.   argentina is constantly borrowing from the imf just to pay their loans back.    in fact i remember a few years they said out right 'if you dont give us 60 billion in loans we stop paying our bond payments' which was about 1 billion.    

here is a lesson: the borrowerer has the power over the lender

LawsofPhysics's picture

Bullshit.  Whoever has the greater military might behind them has the power, oeriod.  Same as it ever was.  None of this is about money.  Wake the fuck up, it has always been about power and control.

tobus's picture

"Getting Spain and Italy on a stable footing is a critical part of any plan to have Greece leave."

A critical and impossible part of any plan to have Greece leave.

cnx's picture

-"Expelliarmus Debtus!"

William113's picture

Can somebody please tell me why NOBODY has reported on GMAC going bankrupt. I received a notice from them 10 days ago and not one media outlet has reported it.

Al Huxley's picture

Google it - it's there, and it's just the residential mortgage unit of what is now Ally Financial.

DosZap's picture

Can somebody please tell me why NOBODY has reported on GMAC going bankrupt. I received a notice from them 10 days ago and not one media outlet has reported it.


Think they were entirely brought under ALLY Banks venue.

Doña K's picture

Greece's best save-face chance is for Spain or Portugal to go first.

prains's picture

the optimistic case is it will finally bring forth the giant cosmic flush or reset depending on your predilection

RSloane's picture

Whyever would Greece voluntarily exit?

Winston Churchill's picture

You're looking at it the the wromg way.

Germany will leave first.

They will somehow  deal with a highly valued Mark.

Not with economic 'carpet bombing' recuing the Club Med periphery.

Germany first ,and 'uber alles' always.

brunoaa's picture

I agree. Germans are logical people, they see there is no way out in the present union, so they will act and face the consequences. Going back to DM will minimize their Euro liabilities and they will only convert into the new DM Euro from German residents, which will also minimize the Target 2 issue.

France and the other latin european countries will be more than happy to take advantage of the devalued euro.

The Reich's picture

Unfortunately almost all German MP's are fanatic "Europeans" and thus let us - the people - pay for it. These MP are traitors to the German people!


It's worse that Versailles.

Ghordius's picture

Fanatics? Elected.
Your views are not maistream, in Germany.

mick_richfield's picture

The MPs were fairly elected.

The check is in the mail.

I won't come in your mouth.


CompassionateFascist's picture

That's about it. Germany will leave the EU only when the current Treason Regime is liquidated. Then, Angela and her Jew Banksters are going to be flayed alive.

Ghordius's picture

Mick, are you aware of that there are foreign countries with radically different election systems and laws?

ThirdWorldDude's picture

Ghordius, are you aware that the Germans are using Nedap's electronic voting machines in the Bundestag elections?



I junked you partly because you're a Eurotard (judging by your avatar and by your blind trust in the corrupt political systems) and partly because of your pseudonym and my Macedonian origin <chuckle> 

oogs66's picture

If Germany leaves the ECB and EFSF are doomed

Neidhammel's picture


Not voluntarily, but ECB will cut off money supply if they don’t vote in conformity with system next time.


eigenvalue's picture

1. Do those politicians (not ZHers or Peter Tchir) think that a Grexit is much worse than Lehman? If not, a Grexit can happen. There already have been talks that Greece is only 2% of the Eurozone GDP and a Grexit will not be a big deal.

2. If anybody that can prevent a Grexit exists, the one will be Germany. Germany has the money. BUT since most Germans want Greece out of the Eurozone, will Merkel defy German citizens' will and risk her election next year?

CatoRenasci's picture

I suspect the Germans' primary concern isn't what Greece does, but rather making sure that German money isn't subsidizing the bad behavior of the Greeks, and the other PIIGS.

MsCreant's picture

I junked you. Greece does not have "bad behavior." Non payment is a good thing. All these contracts should be null and void because they were done under false pretenses. 

If I apply for a loan, and I do not qualify, but you falsify my stats so that I can get the loan, you are a criminal.

GS helped Greece join the union by hiding their debt in accounting tricks. They then shorted Greece. Greek leadership may not be innocent in this, but this is not about bad Greek Behavior.

Fuck Christine Lagarde, telling Greeks that they must pay their taxes. It is patriotic NOT to pay your taxes, particularly when your leaders obligate you to crooked deals you did not ask for. Fuck their system. Fuck all their agreements.


Conchy Joe's picture

If false pretenses justify non payment then the whole system should be junked and no one should pay their bills.

Too bad if someone owes you money though....

MsCreant's picture

"If false pretenses justify non payment then the whole system should be junked and no one should pay their bills."

Not a bad idea...

What if the money you think you were owed is built on illusions and criminal behavior? Did you ever really have it? Or are we to keep propping it up so that those who "think" they have money, but don't, won't revolt and tear the system to shreds?

mick_richfield's picture

If there are people empowered to create money from nothing --

let's just stop right there.

If we permit that, then there is no rule of law, and we are slaves.


CommunityStandard's picture

Yes and no.  Yes, if I were a Greek, I would feel no obligation to pay my taxes.  However, I wouldn't expect my cushy entitlements to continue or the German people to pay for them.  Like you said, NULL AND VOID.  Both sides of the contract must end - payments and benefits.

Miss Expectations's picture

Spoken like a true loan shark.  You've been here how long?  Shame on you.

(I junked you too.)