2012.06.15 17:57:14 Canada Fin Min Backs Fund to Guarantee European Bank Deposits

--Financial markets worry a Grexit will cause Lehman-like chaos

--A better comparison might be Hurricane Katrina

--It is the unintended consequences that will cause the most harm


By Kathleen Madigan

In forecasting the economy, it isn't the devil you know that matters;
it's the devil you don't.

Market pundits and economists are comparing a possible exit by Greece
from the euro zone to the Lehman bankruptcy of 2008. The fear is that
a "Grexit" would cause a seizing in the financial markets, much like
Lehman did, worsening an already weak global economy.

Fears of a Lehman redux loom especially large on Friday as investors
take positions before Greeks vote on Sunday for a new government. Some
hope global central banks will act in concert to offset any
dislocations. That is why financial markets rallied on Friday despite
very weak U.S. economic data. (Or more likely the bad data just
bolstered hopes that the Federal Reserve will add more stimulus at its
policy meeting next week.)

European Central Bank head Mario Draghi has tried to distance the
current crisis from Lehman. In a press conference earlier this month,
he said the debt situation isn't as bad as the market meltdown after
the Lehman collapse in part because back then central bankers took so
long to understand what was happening.

It is that element of surprise that makes Greece different from
Lehman. The better comparison is Hurricane Katrina.

Like the forecasts of Katrina in 2005, Greek storm warnings have been
around for awhile. People have had ample time to prepare for the loss
in exports or possible ratings downgrades. Global banks have tried to
ring-fence Greek financial institutions.

But it isn't the event itself--whether hurricane or exit--that is the
major danger to the outlook. It is the unintended consequences for
which we have taken no preparations.

It was the failure of the levees that flooded New Orleans. We don't
know what over-leveraged hedge fund, currency shock or other domino
effect could cause the Greek drama to overwhelm the global economy.

The unexpected sinks us every time.


(Kathleen Madigan, a special writer, is the primary author of the Big
Picture column. She covered the economy for almost two decades at
BusinessWeek and worked in the economics departments at several Wall
Street firms.)

Write to Kathleen Madigan at kathleen.madigan@dowjones.com


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(END) Dow Jones Newswires

June 15, 2012 11:58 ET (15:58 GMT)