EU is facing 'Lehman moment'

The European Union's failure to contain the Greek debt crisis is sending fresh shockwaves through currencies, money markets, equities and derivatives.

The euro fell more than 2 per cent in the past two days and the cost of protecting corporate bonds soared to the highest level since January, with credit-default swaps anticipating about a 74 per cent chance that Greece would not pay its debts.

Equities declined around the world, while a measure of fear in fixed-income markets jumped the most since November.

Market moves suggest heightened concern that authorities will not be able to keep Greece's debt troubles from spreading after Moody's Investors Service said it may downgrade BNP Paribas and two other big French banks because of their investments in the southern European nation.

The collapse of Lehman Brothers in September 2008 caused credit markets worldwide to freeze as investors fled all but the safest government debt.

"The probability of a eurozone Lehman moment is increasing," said Neil Mackinnon, an economist at VTB Capital in London and a former UK treasury official.

"The markets have moved from simply pricing in a high probability of a Greek debt default to looking at a scenario of it becoming disorderly and of contagion spreading to other economies like Portugal, like Ireland, and maybe Spain, Italy and Belgium."

Lehman's collapse contributed to €1.4 trillion in writedowns and losses at the world's biggest financial institutions, data compiled by Bloomberg show, and central banks cut interest rates to record lows as economies slipped into recession.

Markets were roiled yesterday as Greek prime minister George Papandreou said he would name a new government and call a vote of confidence in parliament as he seeks to pressure rebel politicians to back an austerity plan that would secure a new bailout.

The yield on two-year Greek bonds rose today to a record 28.33 per cent and 10-year bond rates gained 6 basis points today to 17.79 per cent. The cost of protecting Greece against default climbed 149 basis points yesterday to an all-time high of 1,754 basis points in London, prices compiled by CMA show.

The MSCI World Index fell a further 0.9 per cent today. Mr Papandreou needs to clinch a parliamentary vote on €78 billion five-year package of budget cuts and asset sales by July to ensure the country receives new EU aid package to avoid the euro-area's first default. "Our duty is to the nation, not to political parties," Mr Papandreou said in comments televised live on state-run NET TV.

"I will form a new government and immediately afterwards seek a vote of confidence in Parliament. It is a time for responsibility."

Mr Papandreou's options narrowed as his bid to garner support from the biggest opposition bloc failed, party allies turned against him and police deployed tear gas to break up anti-government protests in central Athens.

"This is by no means the end of the story, but based on current majority, such a motion should pass," Charles Diebel, head of market strategy at Lloyds Bank Corporate Markets in London, wrote in a note to clients yesterday.

"If not, then Armageddon scenarios come into play, which include default and potentially the whole contagion scenario plays out."

Earlier this week, Standard and Poor's slashed Greece to CCC from B, handing the nation the world's lowest credit rating and noting it's "increasingly likely" to face a debt restructuring. Greece's statistics agency will release unemployment figures today for the first quarter. The jobless rate, at a record 16.2 per cent in March, has climbed faster than projected under last year's €110 billion bailout.

The current sticking point is how to engage private investors in the next stage of rescuing Greece. European Central Bank authorities, including president Jean-Claude Trichet, have pushed back against German plans to lengthen the maturity of Greek bonds, leaving open only the option to persuade bondholders to voluntarily reinvest the proceeds of maturing debt into new securities.

"Keeping existing creditors engaged is far from trivial, as it involves a combination of incentives and penalties," Francesco Garzarelli, a strategist at Goldman Sachs International in London, wrote in a report yesterday.

"If the transactions are to be completed on a "voluntary" basis in order not to trigger a default event, the 'hold out' problem is material" as persuading all lenders to move in lockstep is difficult, he wrote.

Moody's placed the ratings of BNP Paribas, France's biggest bank, and local rivals Societe Generale SA and Credit Agricole SA under reviews that will focus on their holdings of Greek public and private debt "and the potential for inconsistency between the impact of a possible Greek default or restructuring and current rating levels," the firm said in a statement.

"This is a ripple effect of the Greek crisis spilling into European banks," said Sarah Hewin, a senior economist at Standard Chartered Bank in London. "Clearly, there would be an impact if there is an escalation" of the situation, she said.

Agencies