Eastern Europe is about to Blow By Mike Whitney

[Magda Hassan]

Eastern Europe is about to Blow

By Mike Whitney

February 17, 2009 "ICH" -- -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:

"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.

“It is essential that government support through asset relief should not be on a scale that raises concern about over-indebtedness or financing problems. Such considerations are particularly important in the current context of widening budget deficits, rising public debt levels and challenges in sovereign bond issuance." (UK Telegraph)

It's the same wherever banks merged their commercial and investment branches. Debt has skyrocketed to unsustainable levels destabilizing the entire economy. The banks have been operating like hedge funds, concealing their activities on off-balance sheets operations and maximizing their leverage through opaque debt-instruments. Now the global economy is caught in the downdraft of a collapsing speculative bubble. East Europe has been hit hard, but it's just the first of many bowling pins that will fall. All of Europe has been infected by the same virus which originated on Wall Street. Monday's New York Times summarizes developments in the EU:

"Europe sank even deeper into recession than the United States in the closing months of last year, according to figures published Friday...The economy of the 16 countries sharing the euro currency declined by 1.5 percent in the fourth quarter, (an annualized drop of roughly 6 percent) according to the European Union's statistics office. That is even worse than the 1 percent decline in the United States economy during that period, compared with the previous quarter.

“Today’s data wipes out any illusion that the euro zone is getting off lightly in this global downturn,” said Jörg Radeke, an economist at the Center for Economics and Business Research in London. ("Europe Slump Deeper than Expected" New york Times)

The "liquidationists" would like to see governments cut off the flow of funds to ailing financial institutions and let them fail by themselves. It's Darwinian madness, like waiting out a heart attack on the kitchen floor instead of rushing to the hospital for emergency care. The global economy is decelerating at the fastest pace on record. 40 percent of global wealth has been wiped out. The banking system is insolvent, unemployment is soaring, tax revenues are falling, the markets are in shock, housing is crashing, deficits are soaring, and consumer confidence is at its lowest point in history. This is no time to cling to half-baked ideology. The global economy is undergoing a massive system-wide contraction which could spin out of control and plunge us into another world war. Political leaders need to grasp the urgency of the moment and keep the vehicle from careening into the ditch.

[Peter Lemkin]

Cheery news and I'm in the country said to be most badly effected thus far...in Europe :bawling:

It is mind-boggling, if that figure of 40% is correct, of 40% of all wealth having disappeared [in about a year].

[Magda Hassan]

Yes, and where did that 40% of wealth go? It does not just disappear into nothing. It goes somewhere and I for one would like very much to know where.

[Peter Lemkin]

Another year and a half or two and they [THEY] willl have moved all the world's assets into their pockets...and out of ours.....Several years ago it struck me that what was afoot was neo-Midievalism - and most of us that weren't serving the Emperor were going to be returned to being surfs. The Renaissance and Enlightenment are over. Welcome to the dungeon. Lucky ones will get a chained position on straw near the grated window. No second helpings of gruel and watch-out for the rats. Torture every second day. Enjoy.

[Magda Hassan]

Fuck 'em Peter :reddy:

We don't need them but they need us. Without us they are nothing. With out them we are all better off.

[David Guyatt]

Pete, I think you may have hit the nail on the head. Not so much Neo-medievalism, but neo-feudalism which was part of the plan of the Oxford Group, as revealed by Carroll Quigley in his book Tragedy and Hope, to return the world to a serf-master relationship -- and the vehicle for achieving this was the fraternity of banksters:

Pg. 324: the powers of financial capitalism had another far-reaching aim, nothing less than to create a world system of financial control in private hands able to dominate the political system of each country and the economy of the world as a whole. This system was to be controlled in a feudalist fashion by the central banks of the world acting in concert, by secret agreements arrived at in frequent private meetings and conferences.

[Magda Hassan]

Next Wave of Banking Crisis to come from Eastern Europe

By F. William Engdahl

URL of this article: www.globalresearch.ca/index.php?context=va&aid=12339

Global Research, February 18, 2009

European banks face an entirely new wave of losses in coming months not yet calculated in any government bank rescue aid to date. Unlike the losses of US banks which derive initially from their exposures to low-quality sub-prime real estate and other securitized lending, the problems of western European banks, most especially in Austria, Sweden and perhaps Switzerland arise from the massive volumes of loans they made during the 2002-2007 period of extreme low international interest rates to clients in eastern European countries.
The problems in Eastern Europe which are just now emerging with full force are, if you will, an indirect consequence of the libertine monetary policies of the Greenspan Fed from 2002 until 2006, the period where Wall Street's asset backed securitization Ponzi Scheme took off.
The riskiness of these eastern European loans is now coming to light as the global economic recession in both east and west Europe is forcing western banks to pull back, refusing to renew loans or ‘rollover' the credits, leaving thousands of borrowers with unpayable loan debts. 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.
Moody's Rating Service has just announced it ‘might' downgrade a number of western European banks with large exposures to eastern Europe. On the report, the Euro fell to 2 and a half month lows against the dollar.
The Moodys report mentioned especially banks in eastern Europe owned by western European banks including specifically Raiffeisen Zenetralbank Oesterreich and Sweden's Swedbank. The public Moody's warning will now force western banks with subsidiaries in eastern Europe to dramatically tighten lending conditions in the east at just the time the opposite is needed to keep economic growth from collapsing and thereby setting off chair-reaction loan defaults. The western banks are caught in a devil's circle.
According to my well-informed City of London sources, the new concerns over bank exposures to eastern Europe will define the next wave of the global financial crisis, one they believe could be even more devastating than the US sub-prime securitization collapse which triggered the entire crisis of confidence.
As a result of the Moody's warning, west European banks will now likely be selective in supporting their subsidiaries. Moody's report noted that ‘banks in countries that are associated with higher systemic risks might face reduced support.' Western European governments may also establish rules to ensure banks receiving state support are forbidden to aid foreign subsidiaries. This is already the case with Greek banks and the Greek Government. The result is to make a bad situation far worse.
The size of risks are staggering
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.
In the case of Austrian banks, the country faces a rerun of the 1931 Vienna Creditanstalt crisis which in chain-reaction spread to the German banks and brought Continental Europe into the economic crisis of 1931-33. At the recent EU Finance Ministers' meeting in Brussels, Austrian Finance Minister Josef Pröll reportedly pleaded with his colleagues to come up with aEuro150 billion rescue package for the banks in eastern Europe. Austrian banks alone have lentEuro230 billion there, equivalent to 70% of Austria's GDP. Austria's largest bank, Bank Austria, which in turn is owned by Italy's Unicredito along with the German HypoVereinsbank, faces what the Vienna press calls a ‘monetary Stalingrad' over its loan exposure in the east. In a botter historic irony, Bank Austria bought the Vienna Creditanstalt in recent years in its wave of mergers.
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%.'
German Finance Minister Peer Steinbrück reportedly flatly rejected any EU rescue funds for the east, claiming it was not Germany's problem. He may soon regret that as the crisis spreads to German banks and results in far greater costs to German taxpayers. One of the most striking aspects of the present crisis which first erupted in summer of 2007 is the increasingly evident incompetence of leading finance ministers and central bankers from Washington to Brussels to Paris and Frankfurt and Berlin to deal resolutely with the crisis.
The London office of US investment bank, Morgan Stanley has issued a report estimating the total of western European bank lending to the east. According to the report Eastern Europe has borrowed a total of more than $1.7 TRILLION abroad from mainly west European banks. Much of that has been short-term borrowing of less than a year. In 2009 eastern countries must repay or roll-over (renew) some $400 billion, fully 33% of the region's total GDP. As global recession deepens the chances of that are fading by the day. Now western banks are refusing to roll-over such loans, under political pressure and financial pressure back home. The credit window in the east, only two years ago the source of booming profits for the west European banks, have now slammed shut.
Even Russia which a year ago had more than $600 billion foreign exchange reserves, is in a difficult situation. Russian large companies must repay or roll-over $500 billion this year. Russia has bled 36pc of its foreign reserves since August defending the rouble.
In Poland, 60% of all mortgages are in Swiss francs. The Polish zloty has just fallen in half against the Swiss franc. Hungary, the Balkans, the Baltics, and Ukraine are all suffering variants of this same story. As an act of collective folly – by lenders and borrowers – it matches America's sub-prime debacle. This crisis, for European banks comes atop their losses in US real estate securities. In is the next wave of the crisis that is about to hit. Almost all East bloc debts are owed to West Europe, especially Austrian, Swedish, Greek, Italian, and Belgian banks. Europeans account for an astonishing 74% of the entire $4.9 trillion portfolio of loans to emerging markets. They are five times more exposed to this latest crisis than American or Japanese banks, and they are 50pc more leveraged according to the IMF.
Whether it takes months, or just weeks, Europe's financial system now faces a major test and the situation is complicated by the fact that when the rules of the European Central Bank were finalized in the late 1990's, governments could not agree to surrender total national central banking powers to the new ECB. As a result, in this first test of the ECB in a systemic crisis, the bank is unable to act in the same manner as say the Federal Reserve and fiull the role of lender of last resort or to flood the markets with emergency stimulus.
By some estimates the European Central Bank already needs to cut rates to zero and then purchase bonds and Pfandbriefe on a huge scale. It is constrained by geopolitics – a German-Dutch veto – and the Maastricht Treaty. The EBRD estimates that eastern Europe needs at leastEuro400bn in help to cover loans and prop up the credit system.
Europe's governments are making matters worse. Some are pressuring their banks to pull back, undercutting subsidiaries in East Europe. Athens has ordered Greek banks to pull out of the Balkans. The sums needed are beyond the limits of the IMF, which has already bailed out Hungary, Ukraine, Latvia, Belarus, Iceland, and Pakistan – and Turkey next – and is fast exhausting its ownEuro155bn reserve, forcing it to sell its gold reserves to raise cash.
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.
Perhaps most alarming is that the EU institutions don't have any framework for dealing with this. The day they decide not to save one of these one countries will be the trigger for a massive crisis with contagion spreading into the EU.
Clear at present is that for small-minded political reasons, Berlin is not going to rescue Ireland, Spain, Greece and Portugal as the collapse of their credit bubbles leads to rising defaults, or rescue Italy by accepting plans for EU ‘union bonds' should the debt markets boycott Italy's exploding public debt, hitting 112% of GDP next year, just revised up from 101%.


F. William Engdahl is author of A Century of War: Anglo-American Oil Politics and the New World Order (Pluto Press), and Seeds of Destruction: The Hidden Agenda of Genetic Manipulation (www.globalresearch.ca ). His new book, Full Spectrum Dominance: Totalitarian Democracy in the New World Order (Third Millenium Press) is due out at end of March. He may be contacted through his website: www.engdahl.oilgeopolitics.net.

[Peter Lemkin]

Seems as if there won't be much 'standing' in a year or two. The more things collapse, the more they will spark further collapses in this horrible game of dominos. Where will this end? - as I see no one taking any steps other than trying to prop-up the failed model and institutions with the same old failed 'remedies' [snake oil variety].