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Deutsche Bank credit strategist Jim Reid has been on fire lately with his assessment of the Greece situation.In his latest note he offers what’s perhaps the most compelling comparison yet between Greece and Lehman:
It’s difficult to continually kick the can down the road when the can is breaking up in front of your boot. That’s how the Greek situation appears to us at the moment. Indeed, ‘Think the Unthinkable’ was our start-of-the-year mantra and the title of our 2011 Outlook, and the Greece situation looks more like following this path as each day passes. In our view, the only way to arrest the slide is if everyone backs down from their current position or if one side backs down significantly. The ECB, the
Germans and the Greek politicians need to reach a compromise or one needs to aggressively back down fairly quickly. We believe the most likely scenario is still an 11th hour, 59th minute and 59th second market-friendly outcome, but the risks are building as the situation gets ever more difficult to see the endgame.
Regular readers will be aware that we think the global sovereign crisis is still in the early stages, but it does seem that the next few weeks could mark the dramatic end to another chapter in this ongoing story. Will it be a happy ending or a Greek tragedy? No-one really knows at this stage but everyone in every corner of global financial markets should be keeping a very close eye on upcoming Greek events, in our opinion. We believe the period is resembling the build-up to the Lehman
collapse where, although markets were increasingly nervous, virtually everyone expected a last-minute buyer. It’s likely that the relevant parties are now more aware of the consequences post-Lehman, but there are more people that need to reach an agreement than there were during the last days of Lehman.
Although Reid says he expects that 11:59:59 deal, we wonder whether he really believes it.
Just yesterday, in another smashing note, he explained why investors don’t anticipate crises like this better: They think too rationally, thinking that ultimately cooler heads will prevail when obviously sometimes they don’t.
It’s not hard to make the argument that the odds of a Greece default are higher than they were in Lehman’s case. Protesters, partisan politics, fights between anarchists and indignants, and national pride don’t make for an environment where every party can back down, and cooler heads can prevail.
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