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Tuesday, June 16, 2009


southern europe

market weakness is suddenly re-emergent, and edward hugh of fistful of euros links the return of the fear trade to developments surrounding and raising awareness of southern europe -- not eastern europe, southern europe.

So the world seems to work like this. Latvia gets battoned down for a few months via a few billion in loans from the IMF and the EU Commission. As a result, the Baltics now become yesterday’s story - till they aren’t again, of course. And we move on, as I more or less feared, and its time to begin to focus on Southern Europe again (while Eastern Europe deteriorates sufficiently to make it back into the headlines). I think people can only keep so many things in their head at any one time.

Basically the whole EU system seems to be in denial on what is happening at the moment. The markets have been focused on the East, but they are now starting to wake up to the fact that the South is still here, and when this “matures” we will have a full blown financial crisis, that is for sure. At that point the Spanish and Greek governments will effectively lose control of the situation, just as they have done in Latvia and Hungary.

This is one of the reasons I am following Latvia closely. Basically what is happening in the East is a sort of “dry run” for what is going to have to have to happen in the South. The whole package, from “fiscal austerity” as a tool to attack recessions, to “internal devaluation” via price and wage deflation is about to be applied in the South as a path towards restoring export competitiveness and economic growth.

There has been a lot of talk, of late, about the contagion danger from Latvia, but few seem to consider the possibility that - given the way the EU itself is putting its credibility on the line in the Latvian case - if finally Latvia folds (and devalues, as I feel it must), then the contagion problem could leap straight to the South from the East. Obviously Romania is looking very vulnerable to anything that happens virtually anywhere, but Spain looks a lot more vulnerable to me at this point than either Poland or the Czech Republic, due to the massive external financing requirement.

Basically investors have now started to remember that Greece and Spain still exist. I suppose we will now see the crisis zigger-zagger across from the South to the East and back again, with the German real economy receiving body blows on both counts in the middle.

ladies and gentlemen, hugh is describing a return to something like the global crunch conditions of september and october with the epicenter moving from new york to barcelona.

if he is right and latvia becomes the trigger event for a cascade that swamps not just baltic backwaters but greece and spain... iceland's GDP was $12bn. latvia's GDP is around $36bn. greek GDP is $350bn. spanish GDP is $1.4tn. that is a completely different ballgame, and the global exposure to problems of this scale is likely to be made blindingly obvious from the get-go.

and of course any threat of a run on national-level "massive external financing requirements" leads one's thoughts directly to the united states, which remains as ever extremely reliant on foreign-sourced funding for its banking system.

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