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.