Friday, February 27, 2009
the daily eastern europe update
Economic developments in East-Central Europe are very bad. Almost everyone will get IMF loans but, be that as it may, there is a big contraction underway. Nonperforming loans will increase for the West European banks lending to East-Central Europe or lending to firms that are (or were) exporting. Prominent European governments will struggle to afford the implied bailouts - remember, back in October these governments made it quite clear they are on the hook if their banks come under pressure. At the same time, of course, we have a nose dive in property in Ireland, Spain, and the UK.
My point is not that Europe is in big trouble, with no plausible regional rescue mechanisms in place. This is completely obvious - the debate among prominent Europeans is now whether or not to send distressed eurozone members to the IMF, and on what basis.
Focus on this instead: the European banking and fiscal fiasco is a dagger pointed at the heart of major US banks, which have a great deal of exposure - one way or another - to much of Europe. Ask any U.S.-based ”global bank”.
Treasury is constructing an elaborate transfer mechanism through which big banks can be kept in business, thanks to the public purse, without the taxpayer acquiring a majority of the common stock. The contortions required are striking. But this entire approach is predicated on a rosy stress scenario, which assumes the global economy cannot get much worse, at least in the short run.
It may soon be time to wake up.
this is why every last american should actually care about latvian credit downgrades. american money-center banks are insolvent. but eastern european feedback in our globalized crossborder banking world will amplify their already-unfathomable problems until the volume is breaking windows and crumbling foundations.
the worst case screnario is that the government tosses trillions into floating the banks over the next several months -- and then has to nationalize them anyway as it becomes apparent that the hole really is too deep for even the balance sheet of uncle sam to mitigate much less fill, only after the international market for treasury bonds and the dollar tells them so with force.