Sjeltur

Reports about the bad economic situation worldwide are pouring in lately. Shrinking economies, exploding unemployment and budget deficits, it’s all over the news. And it’s probably getting worse. The next wave of economic and financial mayhem, like the one we saw in September and October 2008, seems to be approaching fast and it looks like it will be bigger and worse than that one.

This time it might be Europe, and not the US, writing the next chapter of this disaster novel. The governments in Europe tried to prevent the failure of the banking system by pumping trillions into the financial system, but lately there are more and more signs the system is about to break down again. An important reason is the risk that banks in Western Europe took in Eastern Europe.

After the end of the Cold War several banks in Western Europe expanded their activities to the east. When interest rates reached new lows in the early 2000s, the banks took on higher risks and started to offer home mortgage loans in foreign currencies. It became possible to get a mortgage in, for example, Hungary, that was denominated in Swiss Francs. This was because the interest rates were significantly lower in Switzerland. Problems came when the Hungarian currency started to fall, it forced homeowners in Hungary to repay sometimes double the monthly amount they were used to. Same thing happened in Poland, the Polish Zloty has dropped by 50% in recent months and homeowners in Poland are now facing exploding mortgage payments. And these two countries are not alone, the Balkans, the Baltics, and Ukraine are other examples.

Some banks in Western Europe are exposed to huge risks. At the recent meeting of EU Finance Ministers, Austrian Finance Minister Josef Proll pleaded with his colleagues to come up with 150 billion euros to curb the crisis in Eastern Europe. No surprise, Austrian banks alone have 230 billion euros out there, no less than 70% of Austria’s Gross Domestic Product (GDP). Banks in Western Europe have lend a total of 1.4 trillion euros to the east, and the borrowers have to repay an amount of 300 billion euros this year, a third of the region’s GDP. Given the current crisis, it’s almost a certainty that debt default will happen. Even entire countries in Eastern Europe are facing debt default. The Ukraine, for example, saw a 12% contraction of its economy recently and if this country defaults on its debt, it will be a disaster for banks like Italian UniCredit, Austrian Raiffeisen Zentralbank, and Dutch ING.

The International Monetary Fund (IMF) already bailed out Hungary, Latvia, Belarus, Iceland, and Pakistan. Who is going to bailout the IMF when the IMF itself is out of money? The amount of money needed to bailout more countries that are facing debt default is simply beyond the means of the IMF. It’s fast exhausting its own 155 billion euro reserve, the IMF will be forced to sell its gold reserve to raise cash, soon.

Besides the disaster unfolding in Eastern Europe right now, there are more signs that the next wave of economic and financial troubles is coming. The gold price is rising steadily, now getting close to $1000 per troy ounce, and the recent fall of the stock markets shows that investors are bracing themselves for the next hit. We’re probably still far from the bottom of this crisis, the global economy will shrink even more and there’s a high chance we’ll see debt defaults and a currency crisis at some point to complicate matters. Then we’ll see more and more social problems surfacing, not just economic or financial, paving the way for an authoritarian style of governing. History shows where it can go from there, let’s hope this time it will be different.