Parallels with Lehman’s collapse in 2008 as markets predict that Greece will default on debt.
By Sean O’Grady
The Independent
The eurozone “lurched towards the endgame” yesterday as Standard & Poor’s finally relegated Greece’s sovereign credit rating to “junk” status, downgraded Portugal by two steps to A-, and the yields on Greek debt climbed beyond 15 per cent, a signal that the market regards a default as virtually certain.
The contagion that many feared is threatening to overwhelm the entire single currency area in a remarkably short time. The course of events has parallels with the banking crises of the autumn of 2008, when successive institutions came under attack and their interrelationships and size devastated confidence in the financial system, famously so after the failure of Lehman’s.
For many observers yesterday, it was a matter of “for Lehman’s, read Greece”, as sovereign debt became the new sub-prime. Again there was classic domino effect: bond yields also rose in the other so-called PIIGS group of highly indebted nations – Ireland, Spain and even Italy, as investors demanded higher risk premia to take on these governments’ debts. It raises fears of a sovereign debt crisis on a pan-eurozone scale, and beyond even the resources of Germany and France to resolve, and could leave the very future of the euro in doubt, a little past its tenth birthday celebrations.
Should that happen, or appear remotely likely, then it could plunge the world economy into a further crisis of confidence, jeopardising shaky growth prospects. Investor nervousness was signalled by the fall in the FTSE 100 index – down 2.6 per cent to close at 5603.5 – its biggest one-day fall since last November.
UK and European banks, with varying exposure to Greece, slid and the euro fell a further 1 per cent against the dollar. German Bund futures hit a session high as institutions caught the flight to safety, also driving up US Treasury bills and gold. European equities suffered their biggest losses in two months. British banks have a near-£100bn exposure to the struggling European economies, of which £8bn is to Greece, including public and private entities.
There will also be a capital loss for the European Central Bank, which has taken an undisclosed sum in Greek government bonds as collateral for loans.