Brexit, Grexit and Lehman

Just about two weeks ago, Finnish finance minister Alexander Stubb called a British vote to exit the EU Europe’s “Lehman moment,” meaning it would signal the onset of an economic catastrophe similar to the one that shook the world when we found out that the US investment bank Lehman Brothers was bankrupt in 2008.

How apt is the comparison?

…not much at all.  In fact, I think it’s kind of crazy.


US and EU banks spent the middle of the last decade creating increasingly exotic and risky derivatives based on packages of home mortgage loans.  When there were no mortgages left to grant that might have any prayer of being repaid, the banks manufactured even more preposterous securities based on mortgages that far exceeded the mortgagees ability to repay, and where the amount lent exceeded the value of the property by a lot.  When the music stopped in 2008, institutions like Bear Stearns or Lehman, whose audited financials showed them with billions of dollars in shareholders’ funds, were filled instead with worthless mortgage-backed securities and were actually bankrupt.

That wasn’t the bad part.

Commerce around the world is based on trust and on the financial soundness of banks.  Firms normally send goods to customers in advance of being paid.   They get a bank IOU on shipment, which they can cash in either on delivery or shortly after.  When companies realized that the middleman bank could possibly declare bankruptcy while goods were still in transit and they were holding trade IOUs–meaning they would be unsecured creditors in a bankruptcy proceeding, to be paid at best a small fraction of the IOU amount, and even that a long time in the future–they stopped sending any merchandise   …to anyone.  World trade came to a standstill.

Just as bad, enterprise control software systems showed managements right away how large the losses were that they were incurring by not being able to sell anything.  They responded with mass layoffs of employees.  That made the economic situation even worse.

In comparison, Brexit is a walk in the park.


Of course, the rhetoric of Stubb and other pro-Remain politicians is one of the reasons for the panic that has seized financial markets once the “Leave” result was returned.

The only possible point of comparison I can see is that Brexit could lead to Grexit, Greece exiting the EU.  So far, the austerity regimen imposed by the IMF and the European Central Bank on Greece, when that country confessed to have falsified its national accounts for many years and to be unable to service its government debts, has created nothing but misery for Greece.  Leaving the EU and devaluing its currency would be an alternate solution to Greece’s financial woes.  Were it to do so, however, Greece would likely default on its sovereign debt.  That would hurt the EU banks who still hold large swathes of it.


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