[OPE] More banking problems looming... in the EU

Krugman is now raising the global spectre of "the mother of all currency crises" http://krugman.blogs.nytimes.com/2008/10/26/the-mother-of-all-currency-crises/

NYT offers the following initial list of endangered countries:

On the list of endangered countries, economists put [so far]: Hungary, Russia [and Belarus], Ukraine, Pakistan, Turkey, South Africa, Argentina, Iceland, Estonia, Latvia, Lithuania, Romania and Bulgaria. The economic woes of these countries could reverberate back to the United States, experts say, because many of them are trading partners, at a time when exports are one of the few bright spots in the American economy. http://www.nytimes.com/2008/10/24/business/worldbusiness/24emerge.html?_r=1&hp&oref=slogin

But actually the largest banking problems are likely to be for Western Europe, not the United States:

"The latest data from the Bank for International Settlements shows that Western European banks hold almost all the exposure to the emerging market bubble, now busting with spectacular effect. They account for three-quarters of the total $4.7 trillion £2.96 trillion) in cross-border bank loans to Eastern Europe, Latin America and emerging Asia extended during the global credit boom - a sum that vastly exceeds the scale of both the US sub-prime and Alt-A debacles. Europe has already had its first foretaste of what this may mean. Iceland's demise has left them nursing likely losses of $74bn (£47bn). The Germans have lost $22bn.

Stephen Jen, currency chief at Morgan Stanley, says the emerging market crash is a vastly underestimated risk. It threatens to become "the second epicentre of the global financial crisis", this time unfolding in Europe rather than America. Austria's bank exposure to emerging markets is equal to 85pc of GDP - with a heavy concentration in Hungary, Ukraine, and Serbia - all now queuing up (with Belarus) for rescue packages from the International Monetary Fund. Exposure is 50pc of GDP for Switzerland, 25pc for Sweden, 24pc for the UK, and 23pc for Spain. The US figure is just 4pc. America is the staid old lady in this drama.

Amazingly, Spanish banks alone have lent $316bn to Latin America, almost twice the lending by all US banks combined ($172bn) to what was once the US backyard. Hence the growing doubts about the health of Spain's financial system - already under stress from its own property crash - as Argentina spirals towards another default, and Brazil's currency, bonds and stocks all go into freefall.

Broadly speaking, the US and Japan sat out the emerging market credit boom. The lending spree has been a European play - often using dollar balance sheets, adding another ugly twist as global "deleveraging" causes the dollar to rocket. Nowhere has this been more extreme than in the ex-Soviet bloc. The region has borrowed $1.6 trillion in dollars, euros, and Swiss francs. A few dare-devil homeowners in Hungary and Latvia took out mortgages in Japanese yen. They have just suffered a 40pc rise in their debt since July. Nobody warned them what happens when the Japanese carry trade goes into brutal reverse, as it does when the cycle turns. (...) The threat to Britain lies in emerging Asia, where banks have lent $329bn, almost as much as the Americans and Japanese combined. http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/3260052/Europe-on-the-brink-of-currency-crisis-meltdown.html

J.

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Received on Sun Oct 26 15:47:47 2008