Reuters: Bankruptcy News: COMMENT: Grexit worse than Lehman?

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COMMENT: Grexit worse than Lehman? May 16th 2012, 15:59 By Divyang Shah Wed May 16, 2012 11:59am EDT LONDON, May 16 (IFR) - To say that the price action has become a little ugly would be an understatement but this is exactly what you get when you faced with an unpredictable and unknown outcome of a Grexit. To make comparisons of a Grexit scenario with the fallout from the Lehman LEHMB.UL bankruptcy seems appropriate but unlike 2008/2009 there are two important differences. First, we have less of an ability to utilise fiscal and monetary firepower and, second, China/EM countries are slowing down and unable to compensate. Policymakers can't stop the search for safe havens with duration: The process of de-risking has impacted positions across the board as flight to safety, liquidity and quality sees bond markets as an ultimate store of value. The desire to move out of the bond curve and not just in shorter dated paper highlights how risk aversion has taken on board an air of permanency. In the past players were willing to switch between bonds and equities believing that things would get better, but instead 'risk-on' has largely come on the back of either central bank liquidity or Greece stepping back from the brink. The current phase of risk-off could eventually set itself up for another rally but this won't be without Greece stepping back from the cliff edge and yet more central bank liquidity. The prospects of further QE from the Fed, BoE and BoJ as well as another 3-year LTRO from the ECB has increased, but positive fundamentals continue to be in hiding. Rallies are still only expected to come on the back of pricing out tail risk, as opposed to an active embracing of a more positive and sustainable fundamental outlook. Fiscal policy has been straight jacketed while monetary policy has simply slowed the pace at which the financial sector deleverages. Sentiment on China/EM leads to questions over super cycle: The way in which super-cycle type plays have been coming off (commodity currencies, mining stocks and copper) point to an adverse scenario for the growth outlook to which monetary easing from China/EM has been unable to arrest. We should expect and look for more in the way of stimulus from DM and EM central banks and this could now take the form of a co-ordinated policy response should the Grexit scenario come into play. Concerns over the potency of fiscal/monetary policy and the lack of a China/EM buffer for global growth means that there is a very difficult task at hand in stabilising markets and growth. These differences are enough to support those seeking safe havens on a more entrenched basis as opposed to seeing this as a short-term play. While it is easy to argue that bond markets are overvalued the stage is set for yields to hit yet more new historic lows for gilts, Treasuries and bunds. This is not about valuation but about being in an asset that provides the greatest insulation and protection, and in the current climate this is to be found in gilts, Treasuries and bunds as well as the USD. Link this Share this Digg this Email Reprints

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