Growing Crisis In Eastern Europe

Ambrose Evans-Pritchard updated us today on the growing crisis in Europe

A report by Moody’s released on Tuesday said the region’s banks were coming under severe stress as the property bust combines with a rising debt burden. “Local currency depreciation is a major risk to East Europe banks,” it said.

There are contagion worries for Western banks that have lent $1.74 trillion (£1.22bn) to the ex-Soviet bloc - split between $1 trillion in foreign loans and $700bn in local currency debt through subsidiaries.

Austria’s banks are the most exposed with the share of risk-weighted assets tied to the region reaching 54pc for Raffeisen and 38pc for Erste Bank. The exposure of Germany’s Bayern Bank is 48pc, Italy’s UniCredit is 45pc, and Swedbank is 29pc.

The US government has for the most part played its hand with the new stimulus package and mortgage relief program. The stock market has responded by breaking support and heading toward the November lows.

The crisis continues to globalize, and appears to be entering a new stage of severity. F. William Engdahl comments:

The dimension of the eastern European emerging loan crisis pales anything yet realized. It will force a radical new look at the entire question of bank nationalizations in coming weeks regardless what nice hopes politicians in any party entertain.

…The amount of loans potentially at risk involve mostly Italian, Austrian, Swiss, Swedish and it is believed German banks. Once the countries of the former Soviet Union and Warsaw Pact declared independence in the early 1990’s west European banks rushed in to buy on the cheap the major banks in most of the newly independent east countries. As US interest rate cuts after the stock crisis in 2002 pushed interest rates around the world to new lows, easy credit led to higher risk lending across borders in foreign currencies. In countries such as Hungary Swiss and Austrian banks promoted home mortgage loans denominated in Swiss Franc where interest rates were significantly lower. The only risk at the time was if the Hungarian currency were to devalue, forcing homeowners in Hungary to repay sometimes double the monthly amount in Swiss Francs. That is what has happened over the past 18 months as western banks and funds have dramatically reduced their speculative investments in eastern countries to repatriate capital back home where the mother banks had serious problems caused by the US banking catastrophe. In the case of the Polish Zloty, the currency has dropped in recent months by 50%. The volume of mortgages existing in foreign currencies in Poland is not known but London estimates are that it could be huge.

…According to estimates published in the Vienna financial press, were only 10% of the Austrian loans in the east to default in coming months, it ‘would lead to the collapse of the Austrian financial system.’ The EU’s European Bank for Reconstruction and Development (EBRD) in London estimates that bad debts in the east will exceed 10% and ‘may reach 20%.’

…The recent IMF $16bn rescue of Ukraine has unravelled. The country - facing a 12pc contraction in GDP after the collapse of steel prices - is going towards default, leaving Unicredit, Raffeisen and ING facing disaster. 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.

As noted in Monday’s post, Europe’s banks are more highly leveraged than their American counterparts. Under the circumstances, there appears to be significant likelihood that financial markets will revisit forced deleveraging. Furthermore, we could very easily wake up one morning soon to hear that another country has experienced an Iceland-style economic breakdown, or perhaps even more than one country.

The major indexes look somewhat oversold here, but any bounces should provide good opportunities to increase short exposure. Currently my short positions are as follows: GS, ORI, CEC, RSH, UBS, HRS, CSC, DRI, ABC, CCK, PSS, BBY, KSS, HIG, CBE, FL, and JWN. I also have small long positions AGU, ENER, BWA, LXU, CTSH, IVN, and GIGM.

Subscribe by RSS Subscribe by Email