February 16, 2009
Creditanstalt Redux?: Failure to save East Europe will lead to worldwide meltdown
I've been feeling far too chipper so I decided to check in with Ambrose Evans-Pritchard. Yikes.In November 2010:
From the Telegraph:
The unfolding debt drama in Russia, Ukraine, and the EU states of Eastern Europe has reached acute danger point.Well, other than that Generalfeldmarschall Paulus, how's the weather?...
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....MORE
"Europe stumbles blindly towards its 1931 moment"
Back in June 2009 I got a bit flippant:
Latvia: "A Baltic quagmire, continued"
...Here, for example, is the latest view from Timothy Ash, head of emerging European Research, at RBS:So now we're back to Ambrose in today's Telegraph:
We sense that a similar Rubicon was crossed this week in Latvia when the prior cross party support for the exchange rate peg was finally broken with a former PM calling for a currency correction; just a year back a local economist was arrested for uttering doubts over the durability of the fixed exchange rate regime....MOREAlong with a couple of it's FT Alphaville pals:
Is Eastern Europe on the edge again?
Waiting for Latvia to devalue
The Swedes have a $75 Billion exposure to the Baltic economies that could make Iceland look like a warm-up act, especially if the contagion heads south and the eastern Europe exposure of Austria starts getting spanked. I keep an eye on things (so you don't have to).
Being the professional that I am, I researched this Sunday Telegraph story in depth:
Blondes march in Latvia 'to cheer-up nation'
Photo: AFP/GETTYLed by an orchestra, the first-ever blonde parade featured women dressed inpink and white, some accompanied by lapdogs, in a charity fund-raising event that organisers hope will become an annual event....
Hungary has returned cap in hand to the International Monetary Fund after kicking out inspectors last year, becoming the first country in Eastern Europe to succumb to contagion from eurozone debt stress.
Rising bond yields and a weakening forint has forced the country's Fidesz government to swallow its pride and request a "precautionary" credit from both the International Monetary Fund and Europe, reportedly of €4bn (£3.4bn).The growing likelihood that Hungary's debt will be downgraded has accelerated capital flight, causing two-year debt yields to jump from 5.5pc to 7.5pc since September."Hungary is a warning sign," said Neil Shearing from Capital Economics. "It is the country where the risks are most acute in the region, so this is where you would expect to trouble to start. We fear this may spread to Ukraine and the Balkans. Eastern Europe has enormous external financing needs for the banking system. They won't be able to roll over debts if there is a credit freeze in Western Europe." Mr Shearing said Hungary has to raise external finance equal to 18pc of GDP over the next year. The figures are 14pc for Croatia, and 13pc for Bulgaria.
Eastern Europe is dependent on eurozone lenders and their subsidiaries for about 80pc of its banking system. This leaves the region vulnerable to a credit crunch as foreign groups slash loan books – by €2 trillion over 18 months, according to a Deutsche Bank study – to meet the EU's requirement for 9pc core tier 1 capital....MOREThe folks at FT Alphaville have also been looking east longer than most.
Their "The Swiss National Bank of Poland (and other CEE countries)" is a masters course in the risks of mortgages in a foreign currency and the exposure of the banks making same.
Here's FTA's latest:
Hung out to dry in emerging Europe
Once upon a time foreign ownership of domestic banking sectors was deemed a “rating strength” in central and eastern Europe.
Before the financial crisis, foreign banks had demonstrated their willingness and ability to support their subsidiaries, according to Fitch associate director Michele Napolitano. But those days are now long gone.
As FT Alphaville has already noted, foreign bank ownership, if the owners are from western Europe, usually only means one thing today: deleveraging.
That’s bad news considering the scale of foreign participation in the CEE region:
And the effects of this deleveraging are already being felt. Here’s Fitch on Monday in what now appears to be a prophetic statement:
Fitch Ratings says that if the eurozone crisis were to intensify, capital and funding pressures on eurozone banks may force them to cut funding to their subsidiaries in the Emerging Europe region beyond the level warranted by local conditions. As a result, a reversal in net funding to the Emerging Europe region would reduce credit availability and weaken GDP growth in many countries.Tuesday’s FT followed up with this article...MORE
Finally, here's ZeroHedge:
Austria, Belgian Bonds Crushed
I've said it before:Yesterday we posted a note on Austria, titled "35 Seconds Of TV Air Time Explaining Why Austria's AAA Rating Is Doomed" which among other things demonstrated in very vivid fashion, why courtesy of its massive Hungarian and broadly Eastern European exposure, an Austrian downgrade is virtually imminent. The follow up news that the Austrian Central Bank has henceforth forbidden any incremental Eastern European loan issuance is merely the cherry on top, and confirms that Austria's biggest banks are now on the verge..MORE
In Barbara Tuchman's history of the build-up to World War I, the themes that came through the strongest was how inexorable the process was. And how many opportunities to stop it were blown.
For some months I've had an edge-of-consciousness feeling that comes out of my (limited) understanding of that summer 94 years ago. From a March 28 post on Iceland's economy:
..Reading Mr. Evans-Pritchard's Balkan reference, you can almost hear a muted drumbeat of 1914. Spooky.It's not that I think we're grinding to war, just that I see how we might. Mrs. Tuchman won the Pulitzer Prize for The Guns of August. She won another for Stillwell and the American Experience in China. She also won a National Book Award for A Distant Mirror. A very sharp gal and a class act. Here are a couple quotes:
"Diplomacy means all the wicked devices of the Old World, spheres of influence, balances of power, secret treaties, triple alliances, and, during the interim period, appeasement of Fascism." SourceAnd:
A phenomenon noticeable throughout history regardless of place or period is the pursuit by governments of policies contrary to their own interests. Mankind, it seems, makes a poorer performance of government than of almost any other human activity. In this sphere, wisdom, which may be defined as the exercise of judgment acting on experience, common sense and available information, is less operative and more frustrated that it should be. Why do holders of high office so often act contrary to the way reason points and enlightened self-interest suggests? Why does intelligent mental process seem so often not to function?-Barbara Tuchman, The March of Folly: From Troy to Vietnam, 1984