By Kathleen Madigan
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.
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 are in better shape than they were in 2008. If time heals all wounds, three years have gone a long way in healing economic excesses and the world banking system.
To be sure, sentiment can change on a dime, but for now, the banking system seems to be taking Greece in stride.
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.
Perhaps another key reason to expect the recovery to survive 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. 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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