If Greece Is Bear Stearns, Will the UK Be Lehman?

Monday’s market euphoria across the world at the terms of the European Union/International Monetary Fund rescue package for the European bond market faded Tuesday as investors sold stocks and took profits on the euro. The worry for investors is whether governments in Greece and Portugal can live up to their end of the bargain and manage to significantly cut government spending in the face of bitter opposition from voters.

Despite averting what could have very well turned into a fully-fledged liquidity crisis with Sunday’s news of a 750 billion euros ($951 billion) stabilization fund and European Central Bank assistance for the European bond market some investors remain sceptical that the worst is now behind us.

“The big question I am asking myself is whether Greece is Bear Stearns” Anthony Fry, senior managing director at Evercore Partners, said. “What I really fear is that if Greece is Bear Stearns then the UK is Lehman Brothers.” Fry worked for Lehman before its collapse.

Other analysts have told CNBC the UK is not in major trouble.

Michael Gallagher, director of research at IDEAglobal, said he believes the UK will be alright due to its ability to sell government bonds internally.

Steven Barrow, the head of G10 Research at Standard Bank agreed.

“I am confident about the prospects for the pound,” Barrow said. The difference between the UK and Greece, according to Barrow, is that Britain has more room for maneuver.

“The UK can devalue and print money, the UK will not default, the UK will not need the IMF,” he said.

But with talks over who will form the next UK government dragging on, Fry is adamant that such analysis is nonsense.

“I can’t believe (the UK) can avoid trouble," he said. "The current coalition talks are like arguing over a birthday cake. Once they decide how much of the cake they get they realize no one bothered to bake the cake.”

With a lot of money needing to be raised over the coming months and years, UK borrowing costs are going to move sharply higher, he argued.

“My big fear is that after (Chancellor of the Exchequer) Alistair Darling refused to support the EU/IMF/ECB bailout of the euro zone bond market, the euro zone may stand by and do nothing when the UK gets into trouble,” he said.

Euro Rescue Rally Fades

For the time being, the market has allowed the UK time to form a new government and unveil a credible plan to cut government spending. But the European rescue rally has faded very quickly. Fry said he remains worried about the problems facing Greece spreading to Spain and Portugal despite Sunday night’s unprecedented support.

Debtor Nations
Debtor Nations

“Today will be a correction post Monday’s huge short squeeze," Gallagher said. "The big question now is whether institutional investors will return to the European bond market.”

Pimco’s decision to stay clear of a proposed Greek dollar-denominated bond auction last month was one of the key moments leading up to Sunday’s rescue package. Over the following weeks, July will be crucial, when €227 billion redemptions come up in the euro zone and with Spain needing to refinance significantly that month, according to Gallgher.

“What we are likely to see is a two-tier Europe," he told CNBC. “A double-dip recession in Southern Europe is increasingly likely. Core Europe will slow, but do OK. The outlook to the South is far worse.”

Stephane Deo, the head of European economic research at UBS, is more upbeat on the impact of the rescue package.

"The plan is actually quite impressive," Deo said. "We only need €500 billion to guarantee borrowing for Spain and Portugal, we have €750 billion. The euro still needs to do its work of cutting deficits in countries like Greece, Portugal and Spain and have two years to do so.”

Talk of the single currency breaking up should be dismissed, he added.

The European Debt Crisis - See Complete Coverage
The European Debt Crisis - See Complete Coverage

“Talk of the euro breaking up is nonsense," he said. "What we will get is tighter fiscal cooperation. If Germany is lending money to Spain it will demand tough measures on spending.”

But Simon Derrick, currency strategist at Bank of New York Mellon, is not so sure this will be the case.

”The ECB has agreed to such a program on the basis that governments have assured that they will meet strict budget targets and step up consolidation efforts," he said. "Aside from the questionable politics behind smaller states being ‘inspected’ by their larger brethren, the new, improved Pact’s Achilles Heel will nonetheless remain the same: governments resisting expansionary, deficit financing once its economic fortunes begin to falter.”

So, if if Greece is Bear Stearns and the UK is Lehman, who will be AIG, Freddie or Fannie?

“No comment," Fry said.