Keep a close eye on what is happening in Eastern Europe because it is impacting not only the Euro Banking System and the Euro itself, but also Western Europe’s national economies that have been large exporters to the East. As we have been learning, globalization also brings interconnectiveness; what happens in Europe still matters to the rest of the world. The “Decoupling” theme, so popular among investors in 2005-2007, is being trashed.
The following is an except from the 2/17 Financial Times:
No escape from the eastern pain
“Can western banks extricate themselves from the pain of an eastern European collapse?
“These eastern neighbours owe western banks – mainly in Austria, Italy, France, Belgium, Germany and Sweden – about $1,635 billion.
“Such a figure is almost equivalent to the entire balance sheet of a major bank in any one of these countries, so the question is not trivial.
“However, a better question might be: should western banks extricate themselves from eastern Europe?
“For this group of countries, where exposures are largest, is like the canary in the coalmine of European trade. But as Poland, the Czech Republic, Hungary, Romania and Croatia sicken, western Europe cannot hope to survive with a dash back to the clean air.
“Eastern Europe is at the sharp end of the new financial protectionism, a natural consequence of government involvement in banking.
“But it is also a big contributor to western Europe’s economies, accounting for almost one-quarter of German exports for instance.
“There has been a certain amount of vendor finance at work here. High local interest rates as governments tried to cool growth and move in line with the eurozone encouraged consumers to import first western debt in euros and Swiss francs, then more western goods. Sadly, they have also imported the credit crunch through the same channels.
“The quandary is not going unrecognised – Hungary has already had European Union support. But neither is it fully appreciated. Some believe the euro is doomed to trail after its poorer neighbours. The more the Polish zloty or Hungarian florint sicken, the worse the euro will feel. There is a credit trade choice to be made, too: should you buy protection on, say, Austria or Germany? As the canary chokes, the answer looks like the latter.”
Source: Paul Davies, Financial Times, February 17, 2009.