What if the European elites have got it entirely wrong and, rather than fearing and avoiding a “Lehman moment”, Europe in fact needs one in order to move beyond this interminable state of crisis? Could Greece play the part of Lehman Brothers? There is a strong argument that it should.
By the time of the Lehman bankruptcy the American political system was suffering from acute bailout fatigue: by September 15 2008, the US had already bailed out Bear Stearns (indirectly), Fannie Mae and Freddie Mac. While the steps taken were sufficient to “save” each individual institution, they were obviously insufficient to stop broader contagion or restore confidence. It was clear that policy makers’ faith in further bailouts was at an end.
This was because the problem clearly lay not with individual banks but with the system. The banking sector was woefully undercapitalised and the usual remedy of new private capital was simply unavailable given the uncertainty about the size of the losses on their real estate and structured credit portfolios.
The solution was plain – forced recapitalisations of the banks – but there was little political will to impose such a solution, both because people correctly felt that the banks had created this problem themselves and did not consider them deserving, and because it was not possible – as it rarely is in politics – to scare people (Congress) into doing something merely on account of what might happen if you did not.
The Lehman moment decisively addressed the second problem by providing a good stare into the abyss. The political will to implement a comprehensive solution was almost immediately mobilised. For all their flaws, the measures achieved their primary goal of preventing further big failures and so stabilised depositor and investor confidence – contrast the health of the US banking sector today with that of Europe. If anything, political will to solve the problem became too indiscriminate, so not enough attention was paid to changing banks’ behaviour and incentive structures and too low a price was extracted for their recklessness.
The parallel with the eurozone today should now be obvious. To restore stability, the eurozone needs to institute jointly guaranteed eurozone bonds underpinned by ironclad and enforceable centralised fiscal discipline; eurozone-wide deposit insurance; and mandatory recapitalisations. But political will to do this will not be fully mobilised as long as the alternative of “buying time” appears available: politicians will always choose that option if it is open to them. Even more importantly, the necessary political will cannot be mobilised as long as any of the main beneficiaries, such as Greece, are seen as undeserving.
Greek default and eurozone exit would address both of these issues. After a Greek exit, eurozone leaders would not be able to buy further time. They would face a very clear choice: unite immediately behind a comprehensive fix to secure the countries next in line (Spain, Portugal, Ireland etc) or watch the entire eurozone project disintegrate.
Moreover, these comprehensive measures would then have much greater public legitimacy and acceptance. The Greeks would not be seen as undeserving “free riders” – at present a real political constraint on extending support, not just among Germans. The ever more lurid visions of post-exit apocalypse merely embolden Greeks, as they do now, to believe that “Europe” will always blink.
The public is smarter than politicians give them credit. The experience of bailing out Wall Street and other banks and then watching them pick up where they left off – with no visible change in behaviour or incentive structures – is seared in the public imagination. No wonder there is so little public faith in bailouts for blameful beneficiaries.
The answer to the question of where to draw the line between worthy and unworthy countries is simple: eurozone institutions will help those countries that first help themselves. So we should not continue this never-ending, confidence-sapping series of half-measures to buy yet more time: at best they will postpone defeat while magnifying its eventual effects. It is now time to let Greece go in order to catalyse and legitimise the measures needed to save the rest.
The writer is a founder of Ondra Partners and former head of UK investment banking at Lehman Brothers
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