There have been more than a few comparisons drawn between the crisis in the eurozone and Lehman Brothers here on FT Alphaville. Here’s another, via Tullett Prebon Economist Lena Komileva.
Here are extracts from Komileva’s argument, via a note sent out on Friday (any emphasis FT Alphaville’s):
The current episode of the global crisis is similar to the crisis mechanism that we saw during the “Lehman” phase:
1 – The market has become aware of a substantial pool of solvency risk in a part of the market that previously traded as “low-risk”.
2- As was the case in late 2008, the confidence and liquidity drain experienced in the stressed part of the global financial system – in this case Eurozone peripheral sovereign and bank markets – has not been prevented by the excessive central bank liquidity flooding the markets. Indeed, an Eonia rate of 0.307% in the Eurozone, an effective fed funds rate of 0.20% in the US and a Sonia rate of 0.477% in the UK have not much room to fall further. The liquidity crisis that has taken hold of the markets is once again driven not by a shortage of liquidity but by the collective desire for capital preservation of each financial institution in the market.
3 – Furthermore, the negative effects for banks’ collateral quality, liquidity and capital stemming from deteriorating Euro sovereign credit risk and fears about the euro’s collapse, have transmitted the contagion across every capital market and asset class around the world.
But, Komileva argues, that are some significant differences between the “Lehman shock” and current crisis, as far as they underlying drivers thereof are concerned:
The main point is that the imbalance between leverage and capital (or income), i.e. the insolvency risk, in the financial system is considerably worse, which can become the catalyst of a potentially unprecedented systemic shock.
· First, this is because risky governments in the Euro area traded as “risk-free” until recently, reflecting an enormous mispricing of solvency risk.
· Second, because the policy stabilisation mechanism of containing bank solvency risk through government guarantees and monetary liquidity has already been exhausted.
· Third, and most importantly, the current re-pricing of sovereign risk which started with Greece and has now spilled over to other governments, is potentially unstoppable because there is no superior capital structure in the policy mechanism.
The full note is available in the usual place.
Related links:
Equities and CDS, also eurotrashed – FT Alphaville
Europe is Lehman-fied, part deux – FT Alphaville
Europe is Lehman-fied, part trois – FT Alphaville
Lehman-Greece parallels du jour (II) – FT Alphaville