A prominent argument among those who want to avoid a Greek restructuring/workout/default at all costs is that it would trigger a new financial panic, otherwise known as Son-of-Lehman. If contagion spreads to Ireland or Portugal, Greece becomes Number One Son-of-Lehman, while the next in line becomes the Number Two Son-of-Lehman, and so on. If all hell breaks loose, and Spain or even Italy is forced to walk the plank, we could be looking at the Mother of all Lehmans.
And why is this?
It isn’t just the direct exposures of thinly capitalized banks that has Trichet et al. so spooked, it’s all the credit default swaps written against them. We don’t know how concentrated the counterparty positions are, nor how vulnerable the issuers would be in the event of a default. Even worse, we don’t know the volume, structure or anything else about the likely mountain of derivatives piled on top of all those CDS’s. This stuff is unrecorded and, at a system level, entirely unsupervised.
So the question is, have we run through a full Minsky cycle in only three years, or are we seeing another phase in the disorderly unwinding of the great financial pyramid of the 00's?