Divining the News (DTN)

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The Global Ditch: Is Eastern Europe Primed to Explode?

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Orders in the manufacturing sector, Quarter 4 2008 (Japan, Eurozone, United Kingdom, China, India) - Sources : MarketOracle / JPMorgan. This Graph NOT from the article below

Orders in the manufacturing sector, Quarter 4 2008 (Japan, Eurozone, United Kingdom, China, India) - Sources : MarketOracle / JPMorgan. This Graph NOT from the article below

counterpunch1

By MIKE WHITNEY

Eastern Europe is about to blow. If it does, it could take much of the EU with it. It’s an emergency situation but there are no easy solutions. The IMF doesn’t have the resources for a bailout of this size and the recession is spreading faster than relief efforts can be organized. Finance ministers and central bankers are running in circles trying to put out one fire after another. Its only a matter of time before they are overtaken by events. If one country is allowed to default, the dominoes could begin to tumble through the whole region. This could trigger dramatic changes in the political landscape. The rise of fascism is no longer out of the question.

The UK Telegraph’s economics editor Edmund Conway sums it up like this:

“A ‘second wave’ of countries will fall victim to the economic crisis and face being bailed out by the International Monetary Fund, its chief warned at the G7 summit in Rome….But with some countries’ economies effectively dwarfed by the size of their banking sector and its financial liabilities, there are fears they could fall victim to balance of payments and currency crises, much as Iceland did before receiving emergency assistance from the IMF last year.” (UK Telegraph)

Foreign capital is fleeing at an alarming rate; nearly two-thirds gone in matter of months. Deflation is pushing down asset prices, increasing unemployment, and compounding the debt-burden of financial institutions. It’s the same everywhere. The economies are being hollowed out and stripped of capital. Ukraine is teetering on the brink of bankruptcy. Poland, Latvia, Lithuania, Hungary have all slipped into a low-grade depression. The countries that followed Washington’s economic regimen have suffered the most. They bet that debt-fueled growth and exports would lead to prosperity. That dream has been shattered. They haven’t developed their consumer markets, so demand is weak. Capital is scarce and businesses are being forced to deleverage to avoid default. All of Eastern Europe has gotten a margin call. They need extra funds to cover the falling value of their equity. They need a lifeline from the IMF or their economies will continue to crumble.

The UK Telegraph’s economics correspondent Ambrose Evans-Pritchard has written a series of articles about Eastern Europe. In “Failure to save East Europe will lead to Worldwide meltdown” he says:

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“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….

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.

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). (Ambrose Evans-Pritchard UK Telegraph)

An economic crisis is quickly turning into a political crisis. Riots have broken out in capitals across Eastern Europe. Mr. Geithner had better be paying attention. The prospects for political upheaval are growing. Public anxiety can spill out onto the streets at a moments notice. Governments must act quickly and with resolve. These countries need hard currency and guarantees of support. If they don’t get help, the simmering public fury will turn into something much more lethal.

UK Telegraph’s economics correspondent Ambrose Evans-Pritchard:

“Global banks have so far written down half the $2,200bn losses estimated by the IMF. On top of this, EU banks have $1,600bn of exposure to Eastern Europe — increasingly viewed as Europe’s subprime debacle, and EU corporate debts are 95pc of GDP compared to 50pc in the US, a mounting concern as default rates surge.  –more–

Also in the Times: Bank of England to write to Darling to begin printing money

Written by morris

February 18, 2009 at 4:40 pm

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