Everyone, even German Chancellor Angela Merkel, seems to be comparing the Eurozone crisis to Lehman Brothers’ collapse three years ago. According to this reasoning, the default of Greece (or Portugal, Ireland, Spain or Italy) could trigger market chaos, just as Lehman supposedly did in 2008. My own view of Lehman, as a few readers of this blog may remember, is that the conventional wisdom is mistaken in almost every respect. Lehman does seem to me a useful analogy, however. The reason Lehman’s collapse came as such a shock was that the decision to rescue Bear Stearns six months earlier seemed to signal that large troubled institutions would be bailed out. Everyone understandably expected a bailout, and was stunned when no bailout came. European leaders have boxed themselves into a very similar corner. Even now, few think that they will let Greece default, despite the fact that Greece is clearly insolvent and has no real prospect of repaying its debt.
Lehman and the Eurozone Crisis--Skeel
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