(From MIR of February 18,2009)
Eastern Europe and Its Potential Effects on
Other Markets
—
Eastern Europe and Its Potential Effects on Other Markets––Over
the past month or so, I have alluded to the
problems which several countries in Eastern
Europe were facing. Those problems are
rapidly coming to a head. Like the U.S.,
Eastern Europe has a debt problem, but this
one is rooted in foreign currency mortgages,
which are coming unwound. Along with what
appears to be a banking meltdown in Ireland,
the amount of capital which the core
European countries may need to stump up in
order to bailout not only their own banks,
but entire countries from Ireland to Eastern
Europe is beginning to be priced in.
Across
Eastern Europe, a significant number of
mortgages have been written in Swiss
Francs. In Poland, the number of Swiss
Franc mortgages may be as high as 60%. From
Hungary to the Baltics, problems of debt
which cannot be repaid, funding in the
wholesale markets, which is no longer
available, to options exotica and mortgage
funding in foreign currencies (see chart of
SF/Hungarian Forint), are accelerating.
Bank systems in Eastern and Western Europe
are at risk. But this is not just a
European banking problem. My hunch is a
meaningful amount of CDS were written on
European banks by U.S. banks. So if Eastern
Europe ok, the effects may well be felt
around the world, but particularly so in the
West.
Some European
authorities are trying to move quickly to
stop the bleeding. Austria's finance
minister Josef Proll attempted to put
together a 150 billion Euro rescue package
last week, to which the Germans replied it
was not their problem. It will be. I also
note that Peer Steinbruck, Germany's finance
minister, in yet another example of what
goes around, comes around, after lambasting
the U.S. and it's banking system just months
ago, is now saying Euro- region countries
may be forced to bailout other EU members
which face problems refinancing their debt.
He named Ireland as being in a very
difficult situation. Unless I am
geographically challenged Ireland is not in
the East, but like Spain and Portugal, which
are also having financial issues, they are
in the EU.
On Monday,
while America's markets slept, the Polish
Central bank made the following comment.
"The decision to enter ERM2 is based on both
political and economic grounds. The
research carried out shows that it's hard to
find economic arguments supporting entering
this mechanism in the current situation.
(1) This is potentially big. If Poland
chooses to de-link itself from the Euro,
this will have political repercussions, but
the economic/market will also be huge. If
Poland weakens the zloty, a run on the
currencies of Eastern Europe is likely to
ensue and that will spell real trouble for
Western European banks. I have seen one
estimate that 74% of the $4.9 trillion in
loans to emerging markets come from Europe.
The BIS data indicates Western European
banks have more than $200 billion in
exposure just to Poland.
I believe the
EU's financial system is in real trouble and
there is no version of the Federal Reserve
in place to salvage the big Western European
banks. The ECB is charged with fighting
inflation, not turning on the printing
press. There is no policy framework in
Europe for dealing with failing
countries/banks. This suggests there will
be far greater stress which hits the prices
of the European financial stocks and that at
some point the Euro is going to turn up
against the Dollar. This is when I think an
every man for himself mentality may take
over. Should we believe that the Germans
will bailout Spain? Or Portugal? Or even
Poland?
Sources:
Bloomberg Data, Bloomberg News
BIS data
“Banks face
Eastern Europe Downgrades, Moody's Says” By
Zoe Schneeweiss and Niklas Magnusson.
Bloomberg News. February 17, 2009.
“Steinbrueck
Says Euro States May Bail Out Members” By
Rainer Buergin and Holger Elfes.
Bloomberg News. February 17, 2009.
“Failure to
save East Europe will lead to worldwide
meltdown” By Ambrose Evans-Pritchard.
Telegraph.co.uk. February 15, 2009.
(1) “Poland’s
National Bank: Too early for first stage of
Euro, Warsaw, (dpa)”. Bloomberg News.
February 16, 2009.
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Swiss
Franc/Hungarian Forint |
Gold—Clear Breakdown |
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Chart courtesy of Bloomberg LP |

Chart courtesy of Bloomberg LP |
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