Monday, February 16, 2009

Austria wants a bail-out for Eastern Europe

EUobserver brings an article with the title "Austria pleads with Europe for bail-out of east". It appears that "European banks have a financial engagement of some €1.1 trillion in the region" with Austria the most exposed. Other EU countries are less enthusiastic to give the Eastern Europeans a share in the big stimulus and rescue bonanza, but according to Austria there is no alternative because otherwise "eastern Europe will start to collapse.".

I don't give them much of a chance for the moment. We will rather see a string of local bail-outs. Crisis management means at the moment a string of ad hoc decisions. A structural approach seems far away.

The Telegraph sounds even more alarmist: "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).

Spain is up to its neck in Latin America, which has belatedly joined the slump (Mexico's car output fell 51pc in January, and Brazil lost 650,000 jobs in one month). Britain and Switzerland are up to their necks in Asia. "

"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."

"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. "

This sounds like a full panic and chaos in the making. The article calls for a stronger role of the European Central Bank to achieve a coordinated response.

Postscript: it seems that a consensus is growing in Europe about how to handle the mess. The price will probably be a weaker euro as a consequence of the high costs of the bailout (good for me as my income is in dollars). More problematic are the weak countries like Greece and Italy. There is some kind of tabu on letting them go from the euro zone as it might weaken the standing of the euro. However, I can't see how they want to accomplish this. The 3 percent limit was already supposed to prevent countries from going bancrupt and it obviously didn't work. I expect that a lot of money will be wasted before the inevitable is accepted: the euro doesn't work with too different economies.

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