Is This Europe's 'Lehman Moment'? Banks Don't Think So.

Jun 20, 2011

People keep throwing around the phrase "Lehman moment" in connection with Greece's debt problems. The basic idea is that a Greek default would tear a hole in the fabric of global finance and cause widespread chaos — just like the bankruptcy of Lehman Brothers did back in 2008.

One particular question is what a Greek default would mean for banks that hold Greek debt. Just last week, Moody's said it was reviewing three big French banks based on their exposure to Greece.

But big banks themselves don't seem to think the banking system is at risk.

The best way to see this is to look at the TED spread — a measure that came into prominence during the financial crisis, and has faded back into obscurity since then.

The TED spread is a measure of how big, global banks feel about lending money to one another. (Specifically, it measures the difference between three-month LIBOR and the interest rate on three-month Treasury bills.)

The TED spread is very low right now, and it's barely budged in the past few weeks.

In the weeks before Lehman Brothers went bust, the TED spread was five times as high as it is now. (After Lehman went bust, it spiked to 20 times as high as it is now.)

In other words, big banks are perfectly comfortable lending to each other right now. They clearly don't think there's any immediate risk of a "Lehman moment."

Thanks to Jacob Kierkegaard of the Peterson Institute for International Economics for discussing this issue with me.

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