Germany and France face a crucial decision – whether or not to save Greece, and their choices are eerily familiar.
Is Greece’s financial failure a foregone conclusion? Bloomberg reported today that Germany may be preparing for the inevitable end.
But what that means to other countries in Europe and around the world depends on whether Greece is Europe’s Lehman Brothers or Bear Sterns. Let me explain:
Bear Sterns was the first major Wall Street institution to fail and need the help of the Government to ease its transition to its next owner. Yet, this very help led Lehman, AIG and other financial institutions to believe that the government would be there for them as well. Until the very last moments, Lehman’s leaders clung to the false hope that they too would be too big to fail and the government would come to their rescue. They didn’t and failed.
In the aftermath, the US was forced to step in and support all those around Lehman (AIG, Merrill etc.) to bolster confidence and stabilize the markets.
So back to the question at hand: Which is Greece?
If Greece is Europe’s Bear Sterns and the German and French governments help ease them through their woes, others like Ireland, Portugal, Spain, and Italy may not feel the urgency to reform their finances and may depend on those with means to bail them out as well.
If Greece is Europe’s Lehman, then Germany and France will let them default and restructure their assets. Should this happen, we could see a similar domino effect like we experienced after Lehman’s fall. As confidence (read: hope) evaporates and markets react, bailouts may be necessary for much larger and more prominent countries to stabilize the Eurozone.
Germany cannot allow the default dance to go on much longer, as it becomes more costly with time. They must decide: Deal or No Deal; and be prepared for the ramifications of both.
If Greece fails, keep an eye on the sentiment of their Mediterranean neighbors via their bond yields. Countries don’t have a stock to track, so we look to their respective bond yields. The higher they go, the greater the cost to save them.
Wild card: China depends a great deal on Europe for its exports. A hint; an utterance, or for heaven’s sake an announcement of support would go a long way to bolster confidence. More on this topic in the near future.