Emerging East European countries are set to become the worst nightmare of Eurozone banks with a heavy exposure to these once so profitable markets. Looking at the share prices of Italian Unicredit or Austrian Erste Bank and Raiffeisen International - all down more than 60% from their record highs seen a year earlier - the worries appear to have a very real background.
Ambrose Evans-Pritchard offers the saucy details in yesterday's web edition of the Telegraph. After a wave of Eurozone bank insolvencies that lead to a industry concentration through rescue mergers in Germany, the Netherlands, Spain, and the UK, it now appears that tiny Austria may be left holding the bucket in Eastern Europe. Loans to Eastern emerging markets have reached a critical level of 85% of Austria's GDP which is around €240 billion or €32.600 per inhabitant.
According to the Telegraph:
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.
While the world has so far focused on the US banking crisis, the centre of attention will soon shift to Europe as loans in danger of default dwarf the US losses.
“This is the biggest currency crisis the world has ever seen,” said Neil Mellor, a strategist at Bank of New York Mellon.
Experts fear the mayhem may soon trigger a chain reaction within the eurozone itself. The risk is a surge in capital flight from Austria – the country, as it happens, that set off the global banking collapse of May 1931 when Credit-Anstalt went down – and from a string of Club Med countries that rely on foreign funding to cover huge current account deficits.
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.
Recent interest rate moves to defend national currencies show the grade of desperation.
Hungary stunned the markets by raising rates 3pc to 11.5pc in a last-ditch attempt to defend the forint’s currency peg in the ERM.
It is just blood in the water for hedge funds sharks, eyeing a long line of currency kills. “The economy is not strong enough to take it, so you know it is unsustainable,” said Simon Derrick, currency strategist at the Bank of New York Mellon.
Romania raised its overnight lending to 900pc to stem capital flight, recalling the near-crazed gestures by Scandinavia’s central banks in the final days of the 1992 ERM crisis – political moves that turned the Nordic banking crisis into a disaster.
Russia too is in the eye of the storm, despite its energy wealth – or because of it. The cost of insuring Russian sovereign debt through credit default swaps (CDS) surged to 1,200 basis points last week, higher than Iceland’s debt before Götterdammerung struck Reykjavik.
The markets no longer believe that the spending structure of the Russian state is viable as oil threatens to plunge below $60 a barrel. The foreign debt of the oligarchs ($530bn) has surpassed the country’s foreign reserves. Some $47bn has to be repaid over the next two months.
The Euro's Stress Barometer: German-Italian Spread
So far European banks have found support in state guarantees that have shifted the burden of the financial crisis to the shoulders of taxpayers. Traders now watch every political move:
Traders are paying close attention as contagion moves from the periphery of the eurozone into the core. They are tracking the yield spreads between Italian and German 10-year bonds, the stress barometer of monetary union.
The spreads reached a post-EMU high of 93 last week. Nobody knows where the snapping point is, but anything above 100 would be viewed as a red alarm. The market took careful note on Friday that Portugal’s biggest banks, Millenium, BPI, and Banco Espirito Santo are preparing to take up the state’s emergency credit guarantees.
The crisis won't stop here. The excess credit of the past decade has to be written off, leaving a bloody trail in more or less all banks' balance sheets.
UPDATE: Find all relevant figures in this quarterly report from the Bank for International Settlements (BIS).
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