Monday, October 27, 2008
"Europe on the brink of currency crisis meltdown by Ambrose Evans-Pritchard" (The Telegraph)
"The latest data from the Bank for International Settlements shows that Western European banks hold almost all the exposure to the emerging market bubble, now busting with spectacular effect. They account for three-quarters of the total $4.7 trillion £2.96 trillion) in cross-border bank loans to Eastern Europe, Latin America and emerging Asia extended during the global credit boom – a sum that vastly exceeds the scale of both the US sub-prime and Alt-A debacles."
If any part of that paragraph is true it's not possible to assign limits to what will happen. One revelation at the time of the AIG collapse is that European commercial banks use much more leverage than American commercial banks. In terms of capital ratios they were more similar to the now failed Wall Street investment banks.
"Austria’s bank exposure to emerging markets is equal to 85pc of GDP – with a heavy concentration in Hungary, Ukraine, and Serbia – all now queuing up (with Belarus) for rescue packages from the International Monetary Fund. Exposure is 50pc of GDP for Switzerland, 25pc for Sweden, 24pc for the UK, and 23pc for Spain. The US figure is just 4pc. America is the staid old lady in this drama. Amazingly, Spanish banks alone have lent $316bn to Latin America, almost twice the lending by all US banks combined ($172bn) to what was once the US backyard."
That "staid old lady" US 4% refers to percentage of annual GDP. That means 4% of a $13 trillion GDP, or $500 billion. Losses presumably won't be 100%, so only a large fraction of $500 billion needs to be added to US financial institutions' other current capital losses.
If this is the case the amount that governments or indeed the IMF can put into bailouts is far less than enough to work. In which case better that they just let the chips be allowed to fall. Far better that than what Japan did when their property bubble burst - prop up bankrupt banks at the cost of preventing any growth in the real economy for 14 years.
Remember that the ability of real technology to create wealth is undiminished. The oil crisis, which seems to have started this, is over, without any effective government action but merely the price system stimulating the Canadians to exploit their tar sands & the rest of us to cut back. That had the potential to be a real crisis in productivity but solved itself (oil is now back down from $145 to $61.5 today) - though the ownership of some of the factors may change this crisis can only damage real wealth if we make it.