It is the most analyzed subject in international finance: Would a Greek debt default trigger a meltdown in financial markets similar to the one that followed the collapse of Lehman Brothers? Yet senior financial industry executives attending the World Economic Forum in Davos last month were all over the map on the subject. The likelihood and potential impact of a Greek default dominated discussions among the bankers, corporate executives and politicians who gathered at the Swiss ski resort. The event took place as the Greek government was negotiating with private bondholders in hopes of winning an agreement on a massive write-down of Greece’s debts that would avert a default in March.
Samir Assaf, head of global banking and markets at HSBC, said a successful deal would lift sentiment, but he expressed confidence that the market could cope with a default. Banks and investors have “risk managed” 80 percent of their exposure to Greece through swaps, hedges or asset sales, he estimated. “The market has prepared itself for a Greek default, though not necessarily for an exit from the euro zone,” Assaf told Institutional Investor. “When Lehman happened, no one was expecting it.”
Mary Callahan Erdoes, head of J.P. Morgan Asset Management, was equally sanguine. “This is the most talked-about, slow-moving train wreck in the global economy,” she said. If markets were going to crack over Greece’s debt woes, “it likely would have happened two years ago,” she added.
Several European bankers warned against any complacency, however, rejecting the idea that a Greek default would be a nonevent. “I think that’s wrong,” said Baudouin Prot, chairman of BNP Paribas. It would be “a historic error” to allow the country to default on its €350 billion ($460 billion) of debt just as confidence is returning to global markets, he added. Deutsche Bank CEO Josef Ackermann shared Prot’s concern, citing the risk of contagion. The sharp rise in Portuguese yield spreads at the end of last month gave some extra punch to the German banker’s views.
Markets thrive on uncertainty. Without differing opinions, after all, who would stand on the other side of any given trade? Yet the fact that senior financiers could disagree so profoundly on an issue of such crucial importance sent a signal that confidence remains tenuous at best in financial markets.
Politicians did little at Davos to inspire confidence. Resisting pleas from the U.S. Treasury secretary for a bigger fire wall to prevent a cascading series of defaults, Chancellor Angela Merkel said Germany was prepared to move toward a fiscal union as long as other euro members embraced Teutonic discipline and stopped looking to Berlin for bigger bailouts.
Mario Draghi said the European Central Bank was determined to keep Europe’s banks flush with liquidity, but he indicated that the ECB would not act as lender of last resort to strapped governments. The central bank’s purchases of government bonds dwindled to just €500 million in the week ended January 27, but the ECB will conduct another Long Term Refinancing Operation at the end of February, after having injected €489 billion into the banking sector in December. “We know for sure we have avoided a major, major credit crunch,” Draghi told the forum.
Financiers stuck to a message of subdued realism. After spending most of the previous two Davos forums railing against alleged regulatory overreach, bankers appeared to have made their peace with the tougher capital requirements of Basel III; they are trying to rightsize their businesses to produce returns of 12 percent to 15 percent — numbers that would have been derisory before 2007 but now seem awfully hard to achieve. The industry is “more sober-minded” these days, said Bank of America CEO Brian Moynihan.
Attendees from the emerging markets did little to enliven spirits. China dispatched a smaller-than-normal contingent because the forum clashed with the New Year celebrations back home. India’s Commerce and Industry minister, Anand Sharma, spent one public session trying to combat perceptions that corruption and infrastructure shortcomings were slowing his country’s growth potential. Brazilian officials said they hoped to revive growth by ramping up spending in preparation for the 2014 World Cup competition and the 2016 Summer Olympics.
With most of the public conversations focused more on risks than on opportunities, few participants left Davos in a more optimistic frame of mind than when they arrived. As J.P. Morgan’s Erdoes put it: “Things are cheap everywhere in the world. The only question is whether they are cheap enough.”
