The Failure to save East Europe will lead to worldwide meltdown

The Telegraph reports that failure to save East Europe will lead to worldwide meltdown.

(emphasis mine) [my comment]

Failure to save East Europe will lead to worldwide meltdown
The unfolding debt drama in Russia, Ukraine, and the EU states of Eastern Europe has reached acute danger point.
By Ambrose Evans-Pritchard
Last Updated: 2:05AM GMT 15 Feb 2009

If mishandled by the world policy establishment, this debacle is big enough to shatter the fragile banking systems of Western Europe and set off round two of our financial Götterdämmerung.

Austria's finance minister Josef Pröll made frantic efforts last week to put together a —150bn rescue for the ex-Soviet bloc. Well he might. His banks have lent —230bn to the region, equal to 70pc of Austria's GDP.

"A failure rate of 10pc would lead to the collapse of the Austrian financial sector," reported Der Standard in Vienna. Unfortunately, that is about to happen.

The European Bank for Reconstruction and Development (EBRD) says bad debts will top 10pc and may reach 20pc. The Vienna press said Bank Austria and its Italian owner Unicredit face a "monetary Stalingrad" in the East.

Mr Pröll tried to drum up support for his rescue package from EU finance ministers in Brussels last week. The idea was scotched by Germany's Peer Steinbrück. Not our problem, he said. We'll see about that.

Stephen Jen, currency chief at Morgan Stanley, said Eastern Europe has borrowed $1.7 trillion abroad, much on short-term maturities. It must repay — or roll over — $400bn this year, equal to a third of the region's GDP. Good luck. The credit window has slammed shut.

Not even Russia can easily cover the $500bn dollar debts of its oligarchs while oil remains near $33 a barrel. The budget is based on Urals crude at $95. Russia has bled 36pc of its foreign reserves since August defending the rouble.

"This is the largest run on a currency in history," said Mr Jen.
[That would be the dollar in a few months.]

In Poland, 60pc of mortgages are in Swiss francs. The zloty has just halved against the franc. Hungary, the Balkans, the Baltics, and Ukraine are all suffering variants of this story. As an act of collective folly — by lenders and borrowers — it matches America's sub-prime debacle. There is a crucial difference, however. European banks are on the hook for both. US banks are not.
[Wrong, US banks have written trillions in credit default swaps on European banks. So when European banks go under, the US will be hit too.]

Almost all East bloc debts are owed to West Europe, especially Austrian, Swedish, Greek, Italian, and Belgian banks. En plus, Europeans account for an astonishing 74pc of the entire $4.9 trillion portfolio of loans to emerging markets.

They are five times more exposed to this latest bust than American or Japanese banks, and they are 50pc more leveraged (IMF data).
[Incorrect. The US exposure via credit default swaps is even larger]

Spain is up to its neck in Latin America, which has belatedly joined the slump (Mexico's car output fell 51pc in January, and Brazil lost 650,000 jobs in one month). Britain and Switzerland are up to their necks in Asia.
[loans to Asia are likely to prove the safest out of emerging markets]

Whether it takes months, or just weeks, the world is going to discover that Europe's financial system is sunk, and that there is no EU Federal Reserve yet ready to act as a lender of last resort or to flood the markets with emergency stimulus.
[This is a good thing. It means that the euro will survive, unlike the dollar.]

Under a "Taylor Rule" analysis, the European Central Bank already needs [ECB doesn't need to do anything. Bad bank (and countries) should fail] to cut rates to zero and then purchase bonds and Pfandbriefe on a huge scale. It is constrained by geopolitics — a German-Dutch veto — and the Maastricht Treaty. [Just like the federal reserve was constrained during the 1930s]

But I digress. It is East Europe that is blowing up right now. Erik Berglof, EBRD's chief economist, told me the region may need —400bn in help to cover loans and prop up the credit system.

Europe's governments are making matters worse. Some are pressuring their banks to pull back, undercutting subsidiaries in East Europe. Athens has ordered Greek banks to pull out of the Balkans.
[The US did the same thing during the great depression (it withdrew credit from overindebted foreign nations).]

The sums needed are beyond the limits of the IMF, which has already bailed out Hungary, Ukraine, Latvia, Belarus, Iceland, and Pakistan — and Turkey next — and is fast exhausting its own $200bn (—155bn) reserve. We are nearing the point where the IMF may have to print money for the world, using arcane powers to issue Special Drawing Rights. [I don't believe this will happen. The EU will never allow the IMF to print euros]

Its $16bn rescue of Ukraine has unravelled. The country — facing a 12pc contraction in GDP after the collapse of steel prices — is hurtling towards default, leaving Unicredit, Raffeisen and ING in the lurch. Pakistan wants another $7.6bn. Latvia's central bank governor has declared his economy "clinically dead" after it shrank 10.5pc in the fourth quarter. Protesters have smashed the treasury and stormed parliament.

"This is much worse than the East Asia crisis in the 1990s," said Lars Christensen, at Danske Bank.

"There are accidents waiting to happen across the region, but the EU institutions don't have any framework for dealing with this. [which is good for the euro! The US didn't have a framework for dealing with failed banks during the great depression. Thousands of banks went under, but the dollar did just fine.] The day they decide not to save one of these one countries will be the trigger for a massive crisis with contagion spreading into the EU."

Europe is already in deeper trouble than the ECB or EU leaders ever expected. Germany contracted at an annual rate of 8.4pc in the fourth quarter.

If Deutsche Bank is correct, the economy will have shrunk by nearly 9pc before the end of this year. This is the sort of level that stokes popular revolt.

The implications are obvious. Berlin is not going to rescue Ireland, Spain, Greece and Portugal as the collapse of their credit bubbles leads to rising defaults, or rescue Italy by accepting plans for EU "union bonds" should the debt markets take fright at the rocketing trajectory of Italy's public debt (hitting 112pc of GDP next year, just revised up from 101pc — big change), or rescue Austria from its Habsburg adventurism.

So we watch and wait as the lethal brush fires move closer.

If one spark jumps across the eurozone line, we will have global systemic crisis within days. Are the firemen ready?

My reaction:

1) There is no EU Federal Reserve yet ready to act as a lender of last resort or to flood the markets with emergency stimulus.

2) The EU is constrained from more aggressive action by geopolitics (a German-Dutch veto) and the Maastricht Treaty.

3) Since the EU institutions don't have any framework for dealing with failing banks/countries, much of Europe's financial system will be taken down by credit crisis contagion as institutions go under.

4) Berlin is not going to rescue Ireland, Spain, Greece, Portugal, Italy, or Habsburg.

Conclusion: If an insolvent financial system meant a currency collapse, then the US would have experienced hyperinflation back in the 1930s. It is the bailouts of insolvent institutions with printed cash that destroy currencies (what the US is doing). The EU doesn't look set to follow this route, so the euro is likely to strengthen as Europe's financial system implodes.


This entry was posted in Currency_Collapse, Euro_Zone, News_Developments, Wall_Street_Meltdown. Bookmark the permalink.

0 Responses to The Failure to save East Europe will lead to worldwide meltdown

  1. Anonymous says:

    I read your posts every day and I`am impressed by your articles?
    What do You think about holding savings in Swiss franc? I read that they have around 25% currency in gold reserves?
    Thank you for your answer.
    Concerned Eastern European.

  2. Anonymous says:

    The assumption the only way to recover is through hyperinflation is widely expected. In previous comments Eric wrote "Believing the dollar won’t collapse doesn’t make you a contrarian, it makes you part of the mainstream". I disagree. Believing the dollar callapse is mainstream, it is also presented by media as a popular scenario.

    Here are included some basic theses of the post written by Alexander Volynskij (prime-tass.ru).

    So, think it about: there are too many articles around about dollar collapse so i'm stopping to believe it is going to happen.

    There is hill from debts made by US, but if US$ becomes the safe port again, US becomes the winner then. It is not easy to prevent hyperinflation now, but i believe it is possible: US have exported toxic assets around half of the world. Because of that and debts, it is expectable some countries will be bancrupted. In all that chaos anyone will rally around US$ while countries in epicentrum will print their currencies.

    Instead of bancrupt, there can be another event producing chaos, like large regional conflict, terrorist atack.

    As a result:
    - strong dollar makes commodities cheaper,
    - instabillity around the world except US

    If you can assume that this crisis is controlled, in that case it is controlled from US and it will be US who becomes even more stronger.

  3. Anonymous says:

    I read your posts every day and I`am impressed by your articles?
    What do You think about holding savings in Swiss franc? I read that they have around 25% currency in gold reserves?
    Thank you for your answer.
    Concerned Eastern European.
    ------------------

    The swiss already said they would keep their currency 'competitive' and have no qualms to ease quantitatively.

    Why don't you save in actual physical gold instead?

    Just my thoughts.

  4. Anonymous says:

    Hello,

    The past week, I found your site by clicking an article on Global research. This week, I've read most of your postings and I'm very impressed by your analyses. The most of these analyses are my visions too. I've gained much of respect of you.

    Keep it up to date, I follow every day your comments. I will try to subscribe my comments too, but I also ashamed of my English writing... It's too scary and difficult to scribe it correctly (I speak Dutch, but I could read English without any problems, but writing... pfff...)

    But, I'm surprised that you think that euro will survive the financial crise. Did you know that Spain and Italy have lots of debts and couldn't pay all the pensions (paying for older people). They are virtually death...

    When they collapse, then Europe would collapse too...

    And do you think also that euro would taking the leading role of the dollar as currency reserve? If it would be reality, then we will know welfare as never seen before? (like the U.S. in the 'beautiful' years)

    Sincerly

    Yann

  5. Paul Littlewoods says:

    I am a little bit suspicious over the decline of the pound, I think the devaluation was part manipulation, by "friends" of the UK government. If sterling doesn't collapse altogether it could be to the UKs advantage (I know the French and Germans are v unhappy about it).

    I note British banks have invested heavily in Asia but they might (only "might") get away with it.

    I find myself with a fair sum in Swedish and Norwegian Kronor; I'm hoping my funds are safe in these two currencies, though goodness knows whether either country is engaging in quantitatively easing. We live in uncertain times.

  6. Aaron Krowne says:

    Good analysis... I largely agree, with one notable exception.

    I wouldn't be so confident about the Euro after studying the US Great Depression experience. That's because even during the Great Depression, the US dollar was still formally backed by gold. There was only a one-time, discrete devaluation. And yes, gold was confiscated for US citizens, but it was still convertible for foreign governments.

    The Euro is, by contrast, not backed by gold. Or anything. And if there is any "implied" backing, it isn't clear who is fronting the resources for that.

    I don't know that that proves the cash Euro won't benefit from crisis, but it certainly doesn't help the case that it will.

  7. Anonymous said...
    What do You think about holding savings in Swiss franc?

    Holding savings in Swiss franc is safer than holding them in dollars.
    Holding savings in gold is safer than holding them in Swiss franc.

    I read that they have around 25% currency in gold reserves?

    Yes, Switzerland has the world's highest ratio of gold reserves to outstanding currency. As gold prices rise, this ratio will improve until the value of Swiss gold reserves equals the value of outstanding Swiss francs. At that point, Switzerland will have the option of converting the Swiss franc into a hard currency redeemable in gold. (However, for this to happen, gold will first have to rally against the Swiss franc, so that makes gold the safer investment.)

    -------

    Anonymous said...
    Believing the dollar collapse is mainstream, it is also presented by media as a popular scenario.

    I live about 15 minutes from Greenwich CT, one of the wealthiest regions in the US. As of last week (intel gathered over two lunch and a dinner), over 90% of those Greenwich millionaires are sitting on the sidelines with piles of cash (USD). If a dollar collapse was mainstream, these rich investors would be sitting on a pile of gold, not soon to be worthless dollars.

    So, think it about: there are too many articles around about dollar collapse so i'm stopping to believe it is going to happen.

    That is your right, but is "too many articles " really a good reason to risk your lifesavings?

    There is hill from debts made by US, but if US$ becomes the safe port again, US becomes the winner then.

    And how will that happen? Without a dollar collapse, how will the US escape its mountain of debt?

    US have exported toxic assets around half of the world.

    Not everywhere. Chinese banks, for example, don't have any exposure to US bad debt.

    The Strength of China's Banking System

    Because of that and debts, it is expectable some countries will be bancrupted.

    Agreed, many European states will go under.

    In all that chaos anyone will rally around US$ while countries in epicentrum will print their currencies.

    One problem with that analysis: euro zone countries will go bankrupt precicely because they can't print euros. They don't have the authority.

    So while the US prints trillions to bail out its banks, and the EU is going to let banks fail without printing money.

    -------

    Yann said...
    But, I'm surprised that you think that euro will survive the financial crise. Did you know that Spain and Italy have lots of debts and couldn't pay all the pensions (paying for older people). They are virtually death...

    When they collapse, then Europe would collapse too...

    When they collapse, Europe's financial system will collapse, but the euro will rally. This is what happened during the US's great depression: Between 1929 and 1933, two out of every five banks in America collapsed.

    And do you think also that euro would taking the leading role of the dollar as currency reserve?

    Yes, yuan, euro, and gold will likely be the new reserve currencies.

    If it would be reality, then we will know welfare as never seen before? (like the U.S. in the 'beautiful' years)

    Maybe eventually, but not right away.

    -------

    Paul Littlewoods said...
    I find myself with a fair sum in Swedish and Norwegian Kronor

    Safer than the dollar, but why not gold?

    -------

    Aaron Krowne said...
    The Euro is, by contrast, not backed by gold Or anything.

    Not, currently, but the EU's large gold reserves offers the possibility of eventually converting the euro into a hard currency backed by gold.

  8. Anonymous says:

    Eric thank You for Your comments.

  9. Anonymous says:

    Hello Eric,

    here an intersting article on http://www.321gold.com of William Endagl.

    http://www.321gold.com/editorials/engdahl/engdahl021909.html

    Greetings

    Yann

  10. Anonymous says:

    Hey, the link is not complete, I've tried to post the link two times to correct it and it's not complete???

    Now for the third time:

    http://www.321gold.com/editorials /engdahl/engdahl021909.html

    or try to find the article on this site: Next Wave of Banking Crisis to come from Eastern Europe

  11. Robert says:

    Eric:

    BIS Data Misinterpreted - East Europe Not That Bad !

    Have a look at this article today on MarketWatch.com - the Austrians claim the Easter European debt problem is FAR SMALLER than feared - due to GROSS MIS-INTERPRETATION of Bank of International Settlement data.

    http://www.marketwatch.com/news/story/Austrias-Erste-says-debt-levels/story.aspx?guid={F7C61CF2-FB3C-4373-B59C-92E0F41D5D30}

    If their contention proves correct - perhaps the Euro should be revisited in light of this ?

    Robert Lahey

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