Greece could spark 'Lehman moment' for Europe

The European Union's failure to contain the Greek debt crisis is sending fresh shockwaves through currencies, money markets, equities and derivatives.

The euro tumbled almost 2 per cent yesterday in its biggest drop since May 5. The cost of protecting corporate bonds soared to the highest level since January, with credit-default swaps anticipating about a 74 per cent chance that Greece won't pay its debts.

Equities tumbled around the world, while a measure of fear in fixed-income markets jumped the most since November. Market moves suggest heightened concern that authorities won't be able to keep Greece's debt troubles from spreading after Moody's Investors Service said it may downgrade BNP Paribas and two other big French banks because of their investments there.

The collapse of Lehman Brothers in September 2008 caused credit markets worldwide to freeze as investors fled all but the safest government debt.

"The probability of a eurozone Lehman moment is increasing," said Neil Mackinnon, an economist at VTB Capital in London and a former UK Treasury official. "The markets have moved from simply pricing in a high probability of a Greek debt default to looking at a scenario of it becoming disorderly and of contagion spreading to other economies like Portugal, like Ireland, and maybe Spain, Italy and Belgium."

Lehman's collapse contributed to US$2 trillion ($2.5 trillion) in writedowns and losses at the world's biggest financial institutions. Markets were roiled yesterday as Greek Prime Minister George Papandreou said he would name a new government and call a vote of confidence in Parliament as he seeks to pressure rebel lawmakers to back an austerity plan that would secure a new bailout.

Papandreou needs to clinch a parliamentary vote on a €78 billion ($137 billion) five-year package of budget cuts and asset sales by next month to ensure the country receives a new EU aid package to avoid the euro-area's first default.

"Our duty is to the nation, not to political parties," Papandreou said. "Tomorrow I will form a new government and immediately afterwards seek a vote of confidence in Parliament. It is a time for responsibility."

Papandreou's options narrowed as his bid to garner support from the biggest opposition bloc failed, party allies turned against him and police used tear gas to break up anti-government protests in central Athens.

Unemployment figures for the first quarter are to be released today. The jobless rate, at a record 16.2 per cent in March, has climbed faster than projected under last year's €110 billion bailout.

This week Standard & Poor's slashed Greece to CCC from B, the world's lowest credit rating, noting it is "increasingly likely" to face a debt restructuring.

The sticking point is how to engage private investors in the next stage of rescuing Greece by persuading bondholders to reinvest the proceeds of maturing debt into new securities. European Central Bank authorities including President Jean-Claude Trichet have pushed back against that plan.

"Keeping existing creditors engaged is far from trivial, as it involves a combination of incentives and penalties," said Goldman strategist Francesco Garzarelli.

Moody's placed the ratings of BNP Paribas, France's biggest bank, and local rivals Societe Generale and Credit Agricole under reviews that will focus on their holdings of Greek public and private debt "and the potential for inconsistency between the impact of a possible Greek default or restructuring and current rating levels", Moody's said.

"This is a ripple effect of the Greek crisis spilling into European banks," said Sarah Hewin, a senior economist at Standard Chartered Bank in London. "Clearly, there would be an impact if there is an escalation" of the situation.

- Bloomberg