Michael Tory, former head of U.K. investment banking at Lehman Brothers, just published an op-ed in the Financial Times suggesting that what European policymakers need most right now is not to pull the region’s tenuous economy back from the ledge but to get down on their knees and take a good hard look into the darkness that awaits (subscription required). That’s right, the region needs a “Lehman moment,” Mr. Tory writes in a brave bit of rationalization. In Mr. Tory’s telling, the U.S. Congress lacked the will to tackle broader systemic weakness, both because people believed the banks had brought the problems on themselves, and because opposing political parties only get along when they have to:
The Lehman moment decisively addressed the second problem by providing a good stare into the abyss. The political will to implement a comprehensive solution was almost immediately mobilised. For all their flaws, the measures achieved their primary goal of preventing further big failures and so stabilised depositor and investor confidence—contrast the health of the US banking sector today with that of Europe.
We don’t think he’s wrong, although we’re not sure if we should cringe at or applaud the gall of a former-Lehman banker suggesting Greece should take one for the team. Oh, yes, to have a Lehman moment, someone has to fail:
The parallel with the eurozone today should now be obvious. To restore stability, the eurozone needs to institute jointly guaranteed eurozone bonds underpinned by ironclad and enforceable centralised fiscal discipline; eurozone-wide deposit insurance; and mandatory recapitalisations. But political will to do this will not be fully mobilised as long as the alternative of “buying time” appears available: politicians will always choose that option if it is open to them. Even more importantly, the necessary political will cannot be mobilised as long as any of the main beneficiaries, such as Greece, are seen as undeserving.
Greek default and eurozone exit would address both of these issues. After a Greek exit, eurozone leaders would not be able to buy further time. They would face a very clear choice: unite immediately behind a comprehensive fix to secure the countries next in line (Spain, Portugal, Ireland etc) or watch the entire eurozone project disintegrate.
There are some in Greece who seem happy enough to arrange this.
[Photo: David Shankbone]