More on Europe’s Lehman moment

Posted by Tracy Alloway on Jun 17 11:05. 19 comments | Share

It’s an analogy already made by many commentators on Thursday.And picked up with some aplomb on Friday by BNP Paribas’ Mehernosh Engineer:
A confluence of events has increased volatility which could turn systemic in nature. More…

It’s an analogy already made by many commentators on Thursday.

And picked up with some aplomb on Friday by BNP Paribas’ Mehernosh Engineer:

A confluence of events has increased volatility which could turn systemic in nature. With correlations bunching up once again and trending towards 1.0, the message from the markets is loud and clear that systemic risk is rising and liquidity is poor, which is being reflected in higher volatility and risk premia. Firstly, the Greek political situation remains fluid, raising doubts about the conditions under which the bailout was negotiated. Further, there also seems to be a discord between Germany/EU fiscal conservatives and the ECB about private sector burden sharing. Although political discord is nothing new in terms of risk for the markets, by coming so late in the game it does raise genuine concerns about Greece. The markets being unable to ‘handicap’ this risk, have preferred to shoot first and ask questions later, raising the bearish bias. However, we believe the politicians do understand that the situation is quite similar to Lehman from a systemic risk perspective and clearly the choice is to avoid another deflationary event.

In other words, markets are still getting to grips with their new role as political analysts.

And it’s worth noting that nearly every market ‘concern’ at the moment — from burdensharing for bondholders, to Greek bailouts, the US debt debate, and even QE3 — is deeply politically-charged.

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