"Failure to save East Europe will lead to worldwide meltdown"

[dgrdfd]

I hate to be one of those people that posts something and then doesn’t give their opinion, but I really don’t know enough about economics or Europe to give an intelligent opinion on this so I am posing this to those that do in hopes I and others can learn.

If mishandled by the world policy establishment, this debacle is big enough to shatter the fragile banking systems of Western Europe and set off round two of our financial Götterdämmerung.

. . .

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.

Not even Russia can easily cover the $500bn dollar debts of its oligarchs while oil remains near $33 a barrel. The budget is based on Urals crude at $95. Russia has bled 36pc of its foreign reserves since August defending the rouble.

“This is the largest run on a currency in history,” said Mr Jen.

. . .

“This is much worse than the East Asia crisis in the 1990s,” said Lars Christensen, at Danske Bank.

“There are accidents waiting to happen across the region, but 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.”

Europe is already in deeper trouble than the ECB or EU leaders ever expected. Germany contracted at an annual rate of 8.4pc in the fourth quarter.

If Deutsche Bank is correct, the economy will have shrunk by nearly 9pc before the end of this year. This is the sort of level that stokes popular revolt.

The implications are obvious. 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 take fright at the rocketing trajectory of Italy’s public debt (hitting 112pc of GDP next year, just revised up from 101pc – big change), or rescue Austria from its Habsburg adventurism.

So we watch and wait as the lethal brush fires move closer.

If one spark jumps across the eurozone line, we will have global systemic crisis within days. Are the firemen ready?

Source: Failure to save East Europe will lead to worldwide meltdown

So I guess to at least pose a question for debate, do you consider this to be an accurate analysis? Is it as bad as the author makes it seem? What can or should be done?

[E-Sabbath]

As I understand it, it’s accurate. But I’m sort of half and half on it. Everyone was saying that the EU was stronger, that America was fated to collapse and the EU would take over.
Are all those people wrong?
I was saying that having one currency left these countries unable to modify their financial system in times of need, but I was assured I was wrong about that as well.
So… I got nothing here. According to everyone, it’s impossible.

[tagos]

@E-Sabbath

As I understand it, it’s accurate. But I’m sort of half and half on it. Everyone was saying that the EU was stronger, that America was fated to collapse and the EU would take over.
Are all those people wrong?
I was saying that having one currency left these countries unable to modify their financial system in times of need, but I was assured I was wrong about that as well.
So… I got nothing here. According to everyone, it’s impossible.

The world economic system is so interlinked, with dependencies on cross-border credit flows, that anyone sneezing has the potential to give the rest of us black death.

I subscribe to the Economist magazine nowadays (undoubtedly the best source of analyses of matter economic) and it’s very clear we are in a whole world of hurt than is only going to get a lot worse. And bear in mind this is a very sober, conservative magazine.

To quote from one of their Special Reports

When the financial system fails, everyone suffers. Over the past 22 months the shock has spread from American housing, sector by sector, economy by economy. Some markets have seized up; others are being pounded by volatility. Everywhere good businesses are going bankrupt and jobs are being destroyed. For the first time since 1991 global average income per head is falling. Even as growth in emerging markets has come to a halt, the rich economies look set to shrink. Alan Greenspan, who as chairman of America’s Federal Reserve oversaw the boom, calls the collapse “a once-in-a-half-century, probably once-in-a-century type of event”. Financial markets promised prosperity; instead they have brought hardship.

Financial services are in ruins. Perhaps half of all hedge funds will go out of business. Without government aid, so would many banks. Britain has suffered its first bank-run since Disraeli was prime minister in the 1870s. America has stumbled from one rescue to the next.

In 2006 America’s current-account deficit peaked at 6% of its GDP (see chart 1). Between 2000 and 2008 the country received over $5.7 trillion from abroad to invest, equivalent to over 40% of its 2007 GDP. Over the same period Britain and Ireland absorbed around a fifth of their 2007 GDPs and Spain a vast 50%. The financial system had the job of recycling the money to borrowers. Inevitably, credit became cheaper and savings declined. In America savings fell from around 10% of disposable income in the 1970s to 1% after 2005.

Not everyone agrees about the cause of this torrent of foreign capital. Although some blame Asian saving, others point to Western extravagance. But there is little doubt about the consequences. All four of the debtor countries in the chart enjoyed housing booms. Jeffry Frieden, a political economist at Harvard University, says about three-quarters of credit booms financed from abroad end up in crashes.

[Leaper]

Something that just occurred to me: wouldn’t the economic failure of any region as large (and, at least from the OP’s quotes, as ill-defined) as Eastern Europe cause some really serious economic ripples across the world? Is there a reason why this article isn’t saying “sky is blue, film at 11”?

[tagos]

@Leaper

Something that just occurred to me: wouldn’t the economic failure of any region as large (and, at least from the OP’s quotes, as ill-defined) as Eastern Europe cause some really serious economic ripples across the world? Is there a reason why this article isn’t saying “sky is blue, film at 11”?

Because most people don’t understand that. You’ll find people on this board, supposedly more knowledgeable than most, acting as if this whole thing is some sort of minor perturbation that will just go away real soon of its own accord rather than what it is - a crisis of unmatched depth and complexity unmatched since 1929.

[Rune]

@dgrdfd

I hate to be one of those people that posts something and then doesn’t give their opinion, but I really don’t know enough about economics or Europe to give an intelligent opinion on this so I am posing this to those that do in hopes I and others can learn.

Source: Failure to save East Europe will lead to worldwide meltdown

So I guess to at least pose a question for debate, do you consider this to be an accurate analysis? Is it as bad as the author makes it seem? What can or should be done?

Nothing. Nothing should be done. Let them all fall. Remove the dead weight and cut the losses. At least as far as the fall is caused by previous years or ridiculous overspending and borrowing. And that goes for the EU Med. countries too. Everybody from Ireland to Bulgaria wants Germany to be the sugar-daddy of every deadbeat, overdebted, shitty, European economy. Why the hell should it? Germany has got its own problems.

Denmark and Sweden will probably hold a hand under the Baltic states before they completely bottom out. Ukraine is going bankrupt. It has been on a downwards spiral since the so-called Orange Revolution. All things considered, it would probably be better off merged back in with Russia anyway. Nothing so bad it isn’t good for something.

[Leaper]

@tagos

Because most people don’t understand that. You’ll find people on this board, supposedly more knowledgeable than most, acting as if this whole thing is some sort of minor perturbation that will just go away real soon of its own accord rather than what it is - a crisis of unmatched depth and complexity unmatched since 1929.

But that’s not what I was saying at all. I was saying that it seems rather obvious, in today’s global economy, that an utter economic collapse in a region as large as “Eastern Europe” would have serious consequences for the rest of the world. It’s sort of like saying “if South American went bankrupt, we in the U.S. would feel some of it.” Where did I say I was saying anything about the seriousness of the current situation?

Also, I have the impression that some others here (not all, certainly) simply don’t share your point of view on the situation; I’m not sure that would make them ignorant per se.

[tagos]

@Leaper

But that’s not what I was saying at all. I was saying that it seems rather obvious, in today’s global economy, that an utter economic collapse in a region as large as “Eastern Europe” would have serious consequences for the rest of the world. It’s sort of like saying “if South American went bankrupt, we in the U.S. would feel some of it.” Where did I say I was saying anything about the seriousness of the current situation?

Also, I have the impression that some others here (not all, certainly) simply don’t share your point of view on the situation; I’m not sure that would make them ignorant per se.

You misinterpret me. I was agreeing that it is obvious - just not obvious to a mot of people. And if people do not think the current crisis is extremely serious they are economically ignorant.

[Leaper]

See, that’s just it. You’re bringing in “if people do not think the current crisis is extremely serious,” when my intent was to say nothing one way or the other about it. That’s why I was confused; I was wondering why you were bringing that into my statement - I couldn’t think of a reason unless you thought I was saying something about the current economy. Which I wasn’t.