Thursday, June 23, 2011

Global Markets Everywhere

Will this Greek drama go out on a global tour?

That’s the fear as officials in Athens scramble to work out an austerity plan to avoid defaulting on the nation’s sovereign debt while some Greek voters riot in the streets.
Greek voters riot in the streets

Some market watchers worry Greece 2011 could be a replay of Lehman 2008 when it comes to market performance and economic growth. Greece defaults, markets tank, and the global economy spins into severe recession.

In the “Greece as Lehman redux” scenario, a default would force lenders, especially European banks, to write down billions in Greek loans. The losses would reduce bank capital and trigger a global credit crunch. That’s why rating agencies have put European banks under review for possible downgrade.

Certainly, there are reasons to worry that Greece’s problems could be the last straw for the recovery, especially because a default could bring the unanticipated. And recent data show the U.S. economy has throttled back significantly in the second quarter.

The biggest risk, however, isn’t Greece per se. It is the prospect of other peripheral euro members — Ireland, Spain, and Portugal — following Greece down the default path. That cascade effect has to be avoided.

The U.S. and global economies aren't in better shape than they were in 2008. If time heals all wounds, three years has done nothing in the way of healing economic excesses and the world banking system.

To be sure, sentiment can change on a dime, but, I doubt it, and the banking system seems to be taking it up the ..., well, you know.

Interbank rates remain extremely low. The three-month London interbank lending rate is creeping along below 0.25%. When the financial crisis hit in 2008, it soared above 4%.

Back then, almost all U.S. banks tightened standards on commercial loans — basically shutting off bank lending. At the same time, the commercial paper market froze, leaving businesses no access to cash to meet payrolls or maintain inventories.

Now, the latest Federal Reserve senior loan officer survey shows more bank are easing lending standards than are tightening them. And commercial paper outstanding is expanding so far this year.
Going Down in DEBT

Perhaps another key reason to expect the recovery to go belly up is the long build-up to a possible default. The global credit authorities and financial markets have been digesting this problem for more than a year, and are still where they were a year ago. Some participants think a default is inevitable; Greece should just do it.

Then the world can move on to an even bigger worry: whether the U.S. government will soon default on its debt.

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