Neel Kashkari On Europe: We Had Time To Prepare For Lehman Brothers, But That Still Ended In A Massive Shock

Neel Kashkari

Photo: Mark Wilson/Getty Images

Almost immediately after we got word that a Greek deal with the troika was done, reports emerged that perhaps the deal wasn’t as final as we thought. The next tranche of Greece’s bailout financing hinges on agreements on debt swap terms and commitments on austerity measures.Even if austerity and debt-swap deals are sealed, it might not be enough to contain chaos in Europe.  This is the sentiment of PIMCO’s Neel Kashkari who spoke with CNBC’s Becky Quick and Joe Kiernan this morning.

Kashkari noted that Greece had defaulted many times in the past, but that markets eventually forgot, or regained confidence, and began lending again on favourable terms.

While he thinks Greece is important, Kashkari said he is most concerned about the contagion risks to Italy and Spain. And he drew comparisons to the build-up to the financial crisis of 2008:

“It’s just like the banks in the U.S., you start with the weakest and it goes after the next weakest bank or the next weakest country. So from Greece to Portugal, everyone is focused on Italy and Spain because they are  so large, too large to fail, and so firewalls need to be built around them to protect them, if Greece eventually goes in that direction. 

…So two things, number one, people have had a lot of time to see it coming. Remember, we had six months to see Lehman Brothers coming and that was a massive shock. Number two, the good news is the ECB with their long-term refinance operation has effectively taken the risk of a financial institution default off the table, because it effectively said we will lend to the banks in unlimited quantities, against almost any collateral they have. So that transmission mechanism has been taken care of. But there are other transmission mechanisms outside of the banking sector that  we’re worried about.”

Watch the entire interview at CNBC.

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