Lehman crisis veterans warn against provoking Greek default

Neel Kashkari, who was on the policy frontlines when Lehman Brothers Holdings Inc. crumpled in 2008, warns European governments against pushing Greece too far as they impose conditions for aid.

?It can be very politically satisfying to be tough, but if an uncontrolled default were to lead to contagion around the euro zone, that could be very damaging for all of Europe and for the global economy,? said Kashkari, who four years ago was an aide to then-U.S. Treasury Secretary Henry Paulson and now is head of global equities at Pacific Investment Management Co.

Kashkari is not alone among the Treasury veterans who fought the worst financial turmoil since the Great Depression and now say the euro area should be careful of taking too hard a line with Greece. Their battle-seasoned advice: Avoid encouraging a default unless first acting to ensure foreign economies and banks are protected from the aftershocks.

?This seems like brinkmanship on the part of the European leaders,? said Phillip Swagel, the Treasury?s former chief economist, who now teaches at the University of Maryland in College Park. ?The better approach is to prepare for a future failure so they have a more credible threat to allow Greece to default and possibly leave the euro zone.?

The likelihood of the euro-area?s first default in its 13- year history is growing by the day as Greece faces a March 20 bond redemption totaling 14.5 billion euros ($19 billion). While the nation?s political leaders have signed up for fiscal retrenchment and detailed 325 million euros in new budget cuts for this year, euro-area governments have yet to approve a second bailout of 130 billion euros.

The tactics reflect irritation that Greece backed down on commitments pledged to win a 110 billion euro rescue in 2010, and they suggest greater confidence in Europe?s ability to withstand a default by the Mediterranean nation. German Finance Minister Wolfgang Schaeuble said Feb. 13 that ?we?re better prepared than two years ago.?

?The case for going ahead with the second package is that the alternative is worse,? said Nicola Mai, an economist at JPMorgan Chase