The financial crisis spreading like wildfire across the former Soviet bloc threatens to set off a second and more dangerous banking crisis in Western Europe, tipping the whole Continent into a fully-fledged economic slump.
Currency pegs are being tested to destruction on the fringes of Europe’s monetary union in a traumatic upheaval that recalls the collapse of the Exchange Rate Mechanism in 1992.
“This is the biggest currency crisis the world has ever seen,” said Neil Mellor, a strategist at Bank of New York Mellon.
Experts fear the mayhem may soon trigger a chain reaction within the eurozone itself. The risk is a surge in capital flight from Austria – the country, as it happens, that set off the global banking collapse of May 1931 when Credit-Anstalt went down – and from a string of Club Med countries that rely on foreign funding to cover huge current account deficits.
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.
Europe has already had its first foretaste of what this may mean. Iceland’s demise has left them nursing likely losses of $74bn £47bn. The Germans have lost $22bn.
Stephen Jen, currency chief at Morgan Stanley, says the emerging market crash is a vastly underestimated risk. It threatens to become “the second epicentre of the global financial crisis”, this time unfolding in Europe rather than America.
Gee what exactly can we short?
Found by Norman Speight.
This story is a total BS. Yes, there’s some currency fluctuation, but it is by no means catastrophic. There are some bigger problems, but they have a pin-point spread. Iceland was clearly poorly managed, and Hungary is the only country in Eastern Europe that deserves to be called problematic. So this article feels more like trying to make Americans feel OK about their crisis. Well, guess what, US is the cause and US suffered most (in absolute terms – in relative it’s of course the tiny Iceland that has foolishly invested so much in the trashy US financial market.)
By the way, of all the emergency measures taken by the US Government it was only the last one – to put money directly into banks – that seems really successful. And where did the US Govt take it from? It followed what Gordon Brown did in UK. [Applause. The curtain lowers.]