The 2008 collapse of Lehman Bros ignited a financial meltdown that resulted in widespread bank failures and caused the Dow to lose 18% of its value in just one week.
Yet a Greek default – which even with a bailout becomes increasingly likely with each passing day – would be much, much worse in many respects.
Sure, it’s possible that European Union taxpayers will soon be dragooned into yet another rescue plan. But that would only delay the inevitable: a catastrophic collapse that will dredge up feelings of panic we haven’t witnessed since the global financial crisis hit its apex nearly three years ago.
Dodgy Debt and a Dozing Economy
Greece’s debt, about $430 billion, is less than that of Lehman Brothers, which owed around $600 billion at the time of its bankruptcy. But Greece’s finances are much less sound.
Lehman Brothers participated in the 2003-07 financial bubble with considerable enthusiasm, accumulating vast amounts of the dodgy subprime mortgage paper whose value collapsed in the 2007-08 downturn. But Greece’s misdeeds date back much further – to its 1981 entry into the EU.
As the poorest member of that group, Greece became eligible for a vast array of inventive subsidies, primarily related to agriculture.
But the frauds the country perpetrated to justify even larger subsidies were even more inventive. And this allowed Greece to bring its living standards close to the EU average, while still being subsidized as though it was a genuinely poor country.
Indeed, Greece produced nothing close to the level of economic output that would be needed to justify its spending and the lifestyle of its people.
The problem for Greece is stark: Its people need to suffer a decline in living standards of about 30% to 40%, so that the country’s output is sufficient to repay its debts.
A Greek Default Will Be a Tough Sell
From 45th place in the world ranking of per-capita gross domestic product – above Spain, Israel and New Zealand – Greece needs to lower its living standards to about 65th place. That would put it on a level with Poland, below Hungary and Slovakia, and only modestly above the very well run Chile.
Needless to say, the Greek people are not about to vote democratically in favor of this outcome.
Worse Than Lehman
Last year’s EU-IMF bailout was too lenient. It gave Greece too much money and left far too many opportunities for them to trash downtown Athens in protest.
Since the IMF and the EU insist on being repaid before private creditors, the banks that lent to Greece have been bumped well down the creditors’ totem pole. The upshot: Those banks are on the hook for more than $100 billion.
This is exactly why a Greek default would dwarf the Lehman collapse: There were no artificial forces damaging the banks’ position in the Lehman bankruptcy. And Greece has fewer viable assets than did Lehman.
That means the losses to the banks – almost all of them European banks, in this case – will probably be greater in the event of a Greek default than they were in the Lehman bankruptcy.
As was the case for Lehman, a Greek default would require another bank bailout, another period of cockeyed fiscal and monetary policies and another major recession.
The only difference this time around is that the global recession and bailout will be centered on the EU – as opposed to the United States.
And that’s at least a small bit of comfort to us American taxpayers.
How to Protect Your Savings
First, you can invest in gold through the SPDR Gold Trust (NYSE:GLD). This fund will fall in price as Greece’s default leads to a global panic. But it will quickly recover as yet more money is printed.
Second, you can buy CBOE long-term put options on the S&P 500. On example would be the December 2013 700 contract (CBOE:SPX1321X700-E). This contract will soar in price when Greece defaults, more than offsetting any losses on GLD.