Troubles in Eastern Europe add to drumbeat of economic Armageddon
In a word (or actually two), holy hell. The financial situation in Eastern Europe has gotten absolutely insane over the past few days. Here’s a small sampling of the mass-mediated intel that’s available to us mere mortals — as distinguished from what’s available to those journalistic demigods and deities who have access to actual firsthand information.
Euro tumbles amid East European bank warning
The International Herald Tribune, February 17
Moody’s said faltering economic conditions in Eastern Europe will continue to hit the asset quality and liquidity positions of local subsidiaries of major Western bank, which could spill over to their corporate parents, primarily in Austria, Italy, France, Belgium, Germany and Sweden.
Banks hit by Eastern Europe fears
Forbes, February 17
Moody’s stark warning on Tuesday about economic deterioration in Eastern Europe shook the currency and bond markets, though for many it was simply a confirmation of their growing fears. The euro fell by 1.4% against the dollar after the ratings agency released a note warning that the Eastern European subsidiaries of Western European banks were facing downward pressure and that some would need help from their parent companies.
Eastern Europe is about to blow
Mike Whitney, Novakeo, February 17
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.
RED ALERT: FX dislocation in process
Karl Denninger, Market Ticker, February 16
Someone, apparently someone in Asia, wants dollars. A LOT of dollars. There is a forced-liquidation event underway that is massive, it is against all asset classes and it is spreading. It originated at approximately 7:15 CT this evening and originated out of Asia somewhere. All of the primary currency crosses got hit at once — Euro, Pound, Yen — all weakened dramatically against the dollar and it is still going on. The Asian stock markets got walloped at the same time in coordinated waves of forced selling. At the same time the US futures markets got nailed as well, down some six handles on the /ES in a near-vertical drop. While this sounds “not that big” to move these markets in a coordinated fashion like this is a trillion-dollar enterprise — this is not some small company that went bankrupt, or even a large company. There is no news coverage at the present time identifying the source of this but it is not small and contrary to some reports it is not “automatic selling”; this is forced liquidation. Folks, if this translates into Eastern Europe where there are severe instabilities already brewing literally everything in the financial world could come apart “all at once.” The worse news is that if this happens Bernanke will have killed us (in the US) by extending those swap lines all over the planet during the last six months. These will become utterly uncollectable and they are massive, in the many hundreds of billions of dollars. To those who are reading this, I hope if you’re in the markets you are prepared for extreme levels of violence. You must expect that the authorities will try to arrest the destruction if they are able, but you must also be prepared for the possibility that we have reached a “critical mass” point beyond which “duck and cover” is the only winning strategy.
Note that the event reported immediately above by Denninger kicked into action only a day after renowned financial journalist Ambrose Evans-Pritchard published this piece:
The unfolding debt drama in Russia, Ukraine, and the EU states of Eastern Europe has reached acute danger point
Ambrose Evans-Pritchard, The Telegraph, February 15
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.
…”This is the largest run on a currency in history,” said Mr Jen.
…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 own $200bn (€155bn) reserve. We are nearing the point where the IMF may have to print money for the world, using arcane powers to issue Special Drawing Rights.
…”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.”
…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?
Oh, and in case you want to look at what’s happening anyplace besides Eastern Europe, Japan has just experienced its most severe economic contraction since World War II, California will start THIS WEEK to lay off 20,000 state workers, the University of Arizona has just issued a warning to its students that they should avoid traveling to Mexico over spring break because of instability and danger, GM will probably be forced to declare bankruptcy within the month, and various commentators, including James Howard Kunstler, who has proved eerily accurate in his financial and economic prophecies, is saying (and he’s not the only one) that the U.S. banking system is so thoroughly tanked that Obama will inevitably have to declare a bank holiday in the near future.
Furthermore, MarketWatch, which is run by CBS and is thus as mainstream a source of financial-economic news and analysis as you’re likely to find, has a special page full of articles and videos that they have collectively titled The Spiral. The topic is the deflationary economic pressure that may lead us into a true deflationary depression (i.e., one like the Great Depression). And they include an interview with John Williams, economist extraordinaire and operator of the magnificent Shadowstats Website, who says he thinks it’s likely that U.S. government efforts to stave off deflation will go too far and have a rebound effect of causing hyperinflation — as in Germany, post World War I. He advises hoarding gold and scotch for bartering purposes.
His interview’s title: “$100 Bills as Toilet Tissue?”