How to make Greece more like GM than Lehman
By Rob Cox and Richard Beales
The authors are Reuters Breakingviews columnists. The opinions expressed are their own.
Investors fixated on the possibility that a Greek default would deliver a shock akin to the Lehman Brothers collapse in 2008 may want to consider another analogy. A restructuring of Greece’s obligations could more closely resemble the orderly wind-down of General Motors. The U.S. carmaker’s bankruptcy filing didn’t spark the market or economic Armageddon that followed Lehman’s demise.
What would it take to bring about a GM moment for Greece? Preparation, an orderly mechanism and financial support.
The main difference between the two mega-bankruptcies of Lehman and GM was the level of preparedness of all parties involved. Though GM filed for creditor protection in June 2009, its excessive debt and rich promises extended to retired employees had made its solvency questionable since at least 2005, when the Detroit carmaker saw its credit rating junked. That episode gave investors time to wind down their exposure.
So when GM did finally fail, the fallout was limited. By then, GM had around $170 billion of debt. And participants in the credit default swap market had just $35 billion of gross exposure to deal with, according to the Depository Trust & Clearing Corporation. GM’s tidy bankruptcy process was also made possible by the U.S. and Canadian governments agreeing to provide the equivalent of debtor-in-possession financing, so that the group didn’t have liquidity problems through its period of restructuring.
Lehman was a whole different story. It wasn’t just the company’s hapless management led by Richard Fuld that expected to emerge from the second weekend of September 2008 with a deal to sell or rescue the firm; so did the U.S. government and many in the financial markets. When it filed for bankruptcy protection early on the following Monday morning, its $600 billion balance sheet interlinked as it was with financial institutions and hedge funds across the globe caused mayhem.
If European policymakers want a Greek bankruptcy to end up like a GM non-event rather than a Lehman-style catastrophe, the main lesson is they need to prepare. They’ve certainly had lots of time. The snag is that they’ve squandered it. Greece’s debt of around 350 billion euros is widely held across the European banking system, including the country’s own banks. But most of them have not penciled in a default. So even a methodical haircut would need to be preceded by a mechanism that shores up banks’ capital and reinforces their funding lines; otherwise there might indeed be a post-Lehman style banking panic.
And, of course, a messy default that catches everybody by surprise over a weekend would be even worse. But, again, GM offers a clue about how to proceed. Make it orderly and ensure there continues to be the equivalent of “debtor-in-possession” financing to tide the Hellenic Republic through what would still need to be a long restructuring process.
Admittedly, restructuring GM was an easier task because only two governments needed to agree on continued financial support, whereas with Greece unanimous support by 17 euro zone countries as well as the International Monetary Fund is required. But that just underlines the need for Greece not to fall out with its financial benefactors.
Even a controlled default would risk contagion to the other weak euro zone nations like Ireland and Portugal. But GM’s move towards bankruptcy made Chrysler’s debt restructuring inevitable and nearly took down Ford Motor and an entire supply chain of components manufacturers – and that didn’t cause panic.
Indeed, it’s common in industry that once one competitor cleans up its balance sheet, others do too. If Greece got a breathing space through a controlled restructuring, other stretched governments would be tempted to follow suit. Again, provided the banking systems had been previously shored up and there was an orderly process, this needn’t be massively disruptive to global capital markets or the economy.
Greece is a sovereign nation, of course, not a corporation. Its stakeholders go beyond the constituencies of a company. But the market and economic impacts of two of the biggest U.S. corporate failures in history may nonetheless be instructive. The power is firmly with policymakers to ensure the outcome in Greece has a GM-like, contained impact rather than the global shock of Lehman.