At the end of each month, BBC World News business presenter Jamie Robertson takes a look at the world's major stock markets. This month he considers how long the rally in global markets can continue.
So how long can this go on for? As the markets race ahead, and investors bob along with them through the rapids, the sound of the waterfall ahead gets louder and louder, but no one knows exactly around which bend it will appear.
At the moment investors are driven by a frenetic desire to catch the bull market which many ruefully admit to having missed out on.
Others agonise over when the fall will come so they can jump aboard immediately afterwards, safe in the knowledge that the big drop is behind them.
There are plenty of institutional investors sitting on the sidelines. But there is a weight of money in these markets desperate for returns in a world of negligible interest rates.
Research group Compeer reported that the number of deals placed through retail stockbrokers rose to more than four million in the three months to June, a number surpassed only in spring 2000.
For many that is a sign that a market is reaching bubble proportions, the point at which, in the parlance of 1929, the bellboys are handing out stock tips in the lifts.
Economic optimism
Can we really have reached such a point so soon after the market hit rock bottom?
Yes, we can. The bear market of the 1990s in Japan was marked by many such moments. The crash of 1929 was followed by a 48% rally over six months - followed by another precipitous crash.
That bear market rally was fuelled by economic optimism at the very top. US Treasury Secretary Andrew Mellon said in December 1929: "I see nothing in the present situation that is either menacing or warrants pessimism."
Today's rally can hardly be based on ignorance of the economic facts. Scarcely a day goes by without an economist/politician/journalist explaining how weak the global economy is. And yet the rally continues.
Stimulus packages
Much of this can be put down to the stimulus packages, which have been without question enormously successful in preventing, easing, or perhaps just deferring recession.
Withdrawing those packages will require all the delicacy and finesse of extracting a royal flush from the bottom of a house of cards - which is why the G20 was so keen to assure the markets that nothing gets withdrawn until the recovery is well in place.
That may be some time. The Europeans have been celebrating the fact that Germany and France are out of recession. Yet there are some serious reasons to be concerned about future growth, and most of them lie to the east.
“ Germany may well not be in recession but the nature of the recovery and the scant prospects for its corporate base hardly justify a 34% gain in the Dax since March ”
Six months ago there was a real fear that the Baltic states, Ukraine and several of their neighbours could go into meltdown. The International Monetary Fund and the European Central Bank stepped in with ready cash and disaster was averted.
The stock market response to the crisis was justified. The Ukrainian market, for example, fell 83% from its peak. The response to the recovery (in Ukraine's case a 183% rise from the trough in March), is less so. Then again one expects such volatility from emerging markets.
What one expects less is such a strong rebound in markets that have extensive links with these fragile states. The IMF pointed out this week that European banks have written down only 40% of their bad loans. That failure to recognise dodgy debt lies largely in continental Europe, among banks that have heavy exposure to Eastern European economies.
Drop in lending
"Eastern Europe is in the throes of a very deep downturn, and European banks are still exposed to them, even if the loan losses are related to deep recession rather than to a crisis, as was feared six months ago," says Ken Wattret, Europe economist at BNP Paribas in London.
Wattrett points out that even if banks in Germany, Austria and Italy stay solvent, lending to the corporate sector across Europe is down 6% year-on-year and there is every indication that it will be reduced still further.
And there's more. For the last decade or so Eastern European economies have provided a ready and growing market for German goods.
"That's not coming back," says Wattret, "not for a long time. And that means one of the key drivers of the European economy, the German exports to the east, is severely curtailed."
Germany may well not be in recession but the nature of the recovery and the scant prospects for its corporate base hardly justify a 34% gain in the Dax since March, while a 43% gain in the Italian MIB Index, and a 50% gain in the Austrian market are starting to starting to take on a distinctly bubbly appearance.
Story from BBC NEWS:
http://news.bbc.co.uk/go/pr/fr/-/2/hi/business/8285470.stm
Published: 2009/10/02 09:05:55 GMT
© BBC MMIX
Showing posts with label Eastern Europe. Show all posts
Showing posts with label Eastern Europe. Show all posts
Thursday, 26 November 2009
Wednesday, 11 November 2009
Russian shares are cheap again
Russian shares are cheap again
Eastern Europe has witnessed momentous changes since the fall of the Berlin Wall 20 years ago.
By Elena Shaftan
Published: 5:54AM GMT 05 Nov 2009
In the two decades since this historic event, the lives of people in the former Communist Bloc have changed beyond recognition – changes that have increasingly attracted the attention of investors since stock exchanges started to open up in the region in the early to mid 1990s.
During this time, investors' focus has largely been on the opportunities presented by the convergence of Eastern European economies with those in the West.
Commodity shares to rise However, 20 years on from the symbolic collapse of the Wall and notwithstanding some setbacks, a lot of the "easy gains" have arguably been made from this story.
Having been through some difficult adjustments in the 1990s, most former Communist states are now members of the EU and share a common legal and regulatory framework with the West.
Living standards in the region have improved across the board as wages have risen and consumers have begun to discover credit. However, labour costs in many economies remain about a quarter of those in the West and taxes are a third lower than in Germany, ensuring the region remains an attractive destination for companies seeking to lower production costs.
Yet the development of these young democracies has hardly been uniform – some very clear winners and losers have emerged and it is worth casting a fresh eye over the new opportunities ahead of us.
Followers of the region will be all too aware that some of the smaller countries in the Baltics and Balkans got carried away with borrowing their way to growth, resulting in much publicised economic imbalances. However, the situation in economies such as Poland, Turkey, Russia and the Czech Republic couldn't be more different and this is where I believe the greatest prospects now lie.
These countries are benefiting from an improving economic outlook. They have substantial and still under-developed domestic markets and, with consumer debt levels of only 10pc to 30pc of gross domestic product (GDP) - versus 100pc for the UK - offer superior growth prospects than their less-fortunate neighbours.
In Poland for example, economic growth was 1.1pc in the second quarter, having remained positive even during the depths of the financial and economic crisis. Poland has benefited from relatively low exposure to exports but its solid performance has also been underpinned by structural factors.
While many other emerging economies thrived in 2001-2002, Poland struggled as unemployment and interest rates hit 20pc. Now they are just 11pc and 3.5pc respectively and the economy is benefiting from the unleashing of substantial pent-up demand.
This, together with a far smaller debt burden than in many other European countries, has allowed consumers to continue spending and support the economy.
Poland and the Czech Republic are also net beneficiaries of EU funding that aims to improve infrastructure. In Poland for example these transfers are worth around 3pc of GDP per annum for the next four years and are set to boost investment and construction.
Turkey offers further opportunities. While the Turkish economy suffered a sharp contraction last winter, it rebounded rapidly with 12pc quarter on quarter growth between April and July.
A positive side effect of the crisis has been the taming of inflation which has been above 20pc for 25 of the past 30 years, but is now down to a historic low of 5.3pc. This has allowed the central bank to slash interest rates from almost 17pc a year ago to an all time low of 6.75pc.
Lower interest rates should feed through to loan growth and stimulate the economy. Signs of recovery are already emerging with home sales rising 72pc year on year in the second quarter, while seasonally-adjusted automobile sales in September are at record levels.
The Russian economy has also stabilised now that the financing constraints that held back businesses over the winter have eased. After a sharp sell off last year, shares in Russian oil and gas companies now appear cheap compared to historical norms and their international peers.
While the events of 2008 have demonstrated that commodity prices can fluctuate in the short term, the development of China and India provides a structural source of incremental demand that is likely to exert upward pressure on prices over time.
But Russia is not just about oil. It is a country of 140m people – a huge consumer market, with a growing middle class aspiring to raise living standards.
Consumption patterns are changing as a result. Russians still drink on average around eight times more vodka than Britons, yet over the past decade, consumption of beer and fruit juices have leapt from next to nothing to near European levels.
Similar trends are emerging for other goods such as yoghurts, mineral water, vitamins, computers, broadband and banking services. These trends are likely to develop over time, benefiting the strongest local companies.
There are other reasons why we like these markets. First, their stock markets are large and liquid compared to others in the region, making them a more attractive destination for international investors, even though they carry more risk and experience greater volatility than Western counterparts.
Second, they often have very different dynamics, so investors can diversify while making the most of any economic and financial recovery.
Russia, for example, is the world's largest oil exporter, while Turkey imports most of the oil that it consumes. Investing in both means fund managers can take advantage of not only rising but also falling energy prices.
The Polish economy is driven primarily by domestic demand, which helped it to grow even when the rest of Europe was contracting in the first half of 2009. Czech equity markets, meanwhile, contain several solid defensive stocks that tend to be less susceptible to difficult economic conditions.
While stocks listed in the 'big four' markets of eastern Europe are most important for us at present, our ability to invest in the broader region means we can discover some hidden gems in smaller regional markets from time to time.
The ability to invest in a wide range of markets - including for example Israel and Croatia, and former Soviet republics such as Kazakhstan and Georgia - has given us the flexibility to adapt to different market conditions.
We are also exploring opportunities among West European companies with successful operations in Eastern Europe, further broadening the investment horizon.
The Eastern Europe of today is a very different place to that of 20 years ago. There have been economic winners and sadly, some losers. However, the opportunities for investors to profit from the region's success stories are clearer than ever.
Elena Shaftan is the fund manager of Jupiter Emerging European Opportunities Fund
http://www.telegraph.co.uk/finance/personalfinance/investing/6501437/Russian-shares-are-cheap-again.html
Eastern Europe has witnessed momentous changes since the fall of the Berlin Wall 20 years ago.
By Elena Shaftan
Published: 5:54AM GMT 05 Nov 2009
In the two decades since this historic event, the lives of people in the former Communist Bloc have changed beyond recognition – changes that have increasingly attracted the attention of investors since stock exchanges started to open up in the region in the early to mid 1990s.
During this time, investors' focus has largely been on the opportunities presented by the convergence of Eastern European economies with those in the West.
Commodity shares to rise However, 20 years on from the symbolic collapse of the Wall and notwithstanding some setbacks, a lot of the "easy gains" have arguably been made from this story.
Having been through some difficult adjustments in the 1990s, most former Communist states are now members of the EU and share a common legal and regulatory framework with the West.
Living standards in the region have improved across the board as wages have risen and consumers have begun to discover credit. However, labour costs in many economies remain about a quarter of those in the West and taxes are a third lower than in Germany, ensuring the region remains an attractive destination for companies seeking to lower production costs.
Yet the development of these young democracies has hardly been uniform – some very clear winners and losers have emerged and it is worth casting a fresh eye over the new opportunities ahead of us.
Followers of the region will be all too aware that some of the smaller countries in the Baltics and Balkans got carried away with borrowing their way to growth, resulting in much publicised economic imbalances. However, the situation in economies such as Poland, Turkey, Russia and the Czech Republic couldn't be more different and this is where I believe the greatest prospects now lie.
These countries are benefiting from an improving economic outlook. They have substantial and still under-developed domestic markets and, with consumer debt levels of only 10pc to 30pc of gross domestic product (GDP) - versus 100pc for the UK - offer superior growth prospects than their less-fortunate neighbours.
In Poland for example, economic growth was 1.1pc in the second quarter, having remained positive even during the depths of the financial and economic crisis. Poland has benefited from relatively low exposure to exports but its solid performance has also been underpinned by structural factors.
While many other emerging economies thrived in 2001-2002, Poland struggled as unemployment and interest rates hit 20pc. Now they are just 11pc and 3.5pc respectively and the economy is benefiting from the unleashing of substantial pent-up demand.
This, together with a far smaller debt burden than in many other European countries, has allowed consumers to continue spending and support the economy.
Poland and the Czech Republic are also net beneficiaries of EU funding that aims to improve infrastructure. In Poland for example these transfers are worth around 3pc of GDP per annum for the next four years and are set to boost investment and construction.
Turkey offers further opportunities. While the Turkish economy suffered a sharp contraction last winter, it rebounded rapidly with 12pc quarter on quarter growth between April and July.
A positive side effect of the crisis has been the taming of inflation which has been above 20pc for 25 of the past 30 years, but is now down to a historic low of 5.3pc. This has allowed the central bank to slash interest rates from almost 17pc a year ago to an all time low of 6.75pc.
Lower interest rates should feed through to loan growth and stimulate the economy. Signs of recovery are already emerging with home sales rising 72pc year on year in the second quarter, while seasonally-adjusted automobile sales in September are at record levels.
The Russian economy has also stabilised now that the financing constraints that held back businesses over the winter have eased. After a sharp sell off last year, shares in Russian oil and gas companies now appear cheap compared to historical norms and their international peers.
While the events of 2008 have demonstrated that commodity prices can fluctuate in the short term, the development of China and India provides a structural source of incremental demand that is likely to exert upward pressure on prices over time.
But Russia is not just about oil. It is a country of 140m people – a huge consumer market, with a growing middle class aspiring to raise living standards.
Consumption patterns are changing as a result. Russians still drink on average around eight times more vodka than Britons, yet over the past decade, consumption of beer and fruit juices have leapt from next to nothing to near European levels.
Similar trends are emerging for other goods such as yoghurts, mineral water, vitamins, computers, broadband and banking services. These trends are likely to develop over time, benefiting the strongest local companies.
There are other reasons why we like these markets. First, their stock markets are large and liquid compared to others in the region, making them a more attractive destination for international investors, even though they carry more risk and experience greater volatility than Western counterparts.
Second, they often have very different dynamics, so investors can diversify while making the most of any economic and financial recovery.
Russia, for example, is the world's largest oil exporter, while Turkey imports most of the oil that it consumes. Investing in both means fund managers can take advantage of not only rising but also falling energy prices.
The Polish economy is driven primarily by domestic demand, which helped it to grow even when the rest of Europe was contracting in the first half of 2009. Czech equity markets, meanwhile, contain several solid defensive stocks that tend to be less susceptible to difficult economic conditions.
While stocks listed in the 'big four' markets of eastern Europe are most important for us at present, our ability to invest in the broader region means we can discover some hidden gems in smaller regional markets from time to time.
The ability to invest in a wide range of markets - including for example Israel and Croatia, and former Soviet republics such as Kazakhstan and Georgia - has given us the flexibility to adapt to different market conditions.
We are also exploring opportunities among West European companies with successful operations in Eastern Europe, further broadening the investment horizon.
The Eastern Europe of today is a very different place to that of 20 years ago. There have been economic winners and sadly, some losers. However, the opportunities for investors to profit from the region's success stories are clearer than ever.
Elena Shaftan is the fund manager of Jupiter Emerging European Opportunities Fund
http://www.telegraph.co.uk/finance/personalfinance/investing/6501437/Russian-shares-are-cheap-again.html
Thursday, 5 March 2009
Europe's Crisis: Much Bigger Than Subprime, Worse Than U.S.
Europe's Crisis: Much Bigger Than Subprime, Worse Than U.S.
Posted Feb 27, 2009 08:00am EST
by Henry Blodget
John Mauldin, president of Millennium Wave Advisors, was among the few analysts whose forecasts for 2008 proved accurate. Mauldin, author of the popular "Thoughts from the Frontline" e-letter, joined us to discuss the economic situation in Eastern Europe.
Scroll down to read highlights from Mauldin's analysis, and click "more" to embed the video.
From The Business Insider:
If you think things are bad here, take a quick peek at what's going on across the pond:
The Telegraph: Stephen Jen, currency chief at Morgan Stanley, said Eastern Europe has borrowed $1.7 trillion abroad, much on short-term maturities. It must repay – or roll over – $400bn this year, equal to a third of the region's GDP. Good luck. The credit window has slammed shut.
Not even Russia can easily cover the $500bn dollar debts of its oligarchs while oil remains near $33 a barrel. The budget is based on Urals crude at $95. Russia has bled 36pc of its foreign reserves since August defending the rouble.
"This is the largest run on a currency in history," said Mr Jen.
In Poland, 60pc of mortgages are in Swiss francs. The zloty has just halved against the franc. Hungary, the Balkans, the Baltics, and Ukraine are all suffering variants of this story. As an act of collective folly – by lenders and borrowers – it matches America's sub-prime debacle. There is a crucial difference, however. European banks are on the hook for both. US banks are not.
Almost all East bloc debts are owed to West Europe, especially Austrian, Swedish, Greek, Italian, and Belgian banks. En plus, Europeans account for an astonishing 74pc of the entire $4.9 trillion portfolio of loans to emerging markets.
They are five times more exposed to this latest bust than American or Japanese banks, and they are 50pc more leveraged (IMF data).
Spain is up to its neck in Latin America, which has belatedly joined the slump (Mexico's car output fell 51pc in January, and Brazil lost 650,000 jobs in one month). Britain and Switzerland are up to their necks in Asia.
Whether it takes months, or just weeks, the world is going to discover that Europe's financial system is sunk, and that there is no EU Federal Reserve yet ready to act as a lender of last resort or to flood the markets with emergency stimulus.
A note from Strategic Energy, as quoted by John Mauldin:
"The sums needed are beyond the limits of the IMF, which has already bailed out Hungary, Ukraine, Latvia, Belarus, Iceland, and Pakistan -- and Turkey next -- and is fast exhausting its own $200bn (€155bn) reserve. We are nearing the point where the IMF may have to print money for the world, using arcane powers to issue Special Drawing Rights. Its $16bn rescue of Ukraine has unravelled. The country -- facing a 12% contraction in GDP after the collapse of steel prices -- is hurtling towards default, leaving Unicredit, Raffeisen and ING in the lurch. Pakistan wants another $7.6bn. Latvia's central bank governor has declared his economy "clinically dead" after it shrank 10.5% in the fourth quarter. Protesters have smashed the treasury and stormed parliament.
"'This is much worse than the East Asia crisis in the 1990s,' said Lars Christensen, at Danske Bank. 'There are accidents waiting to happen across the region, but the EU institutions don't have any framework for dealing with this. The day they decide not to save one of these one countries will be the trigger for a massive crisis with contagion spreading into the EU.' Europe is already in deeper trouble than the ECB or EU leaders ever expected. Germany contracted at an annual rate of 8.4% in the fourth quarter. If Deutsche Bank is correct, the economy will have shrunk by nearly 9% before the end of this year. This is the sort of level that stokes popular revolt.
"The implications are obvious. Berlin is not going to rescue Ireland, Spain, Greece and Portugal as the collapse of their credit bubbles leads to rising defaults, or rescue Italy by accepting plans for EU "union bonds" should the debt markets take fright at the rocketing trajectory of Italy's public debt (hitting 112pc of GDP next year, just revised up from 101pc -- big change), or rescue Austria from its Habsburg adventurism. So we watch and wait as the lethal brush fires move closer. If one spark jumps across the eurozone line, we will have global systemic crisis within days. Are the firemen ready?"
This is why some folks think the dollar is going to remain strong over the coming months: Because the rest of the world is falling apart even faster than we are.
Just as the global economy wasn't "decoupled" at the beginning of 2007, however (when the majority of Wall Street strategists believed that it was), it's not "decoupled" now. So the collapse of Eastern Europe--and, with it, the Western European banks--would almost certainly jump across the pond.
John Mauldin summarizes:
Eastern Europe has borrowed an estimated $1.7 trillion, primarily from Western European banks. And much of Eastern Europe is already in a deep recession bordering on depression. A great deal of that $1.7 trillion is at risk, especially the portion that is in Swiss francs. It is a story that could easily be as big as the US subprime problem.
In Poland, as an example, 60% of mortgages are in Swiss francs. When times are good and currencies are stable, it is nice to have a low-interest Swiss mortgage. And as a requirement for joining the euro currency union, Poland has been required to keep its currency stable against the euro. This gave borrowers comfort that they could borrow at low interest in francs or euros, rather than at much higher local rates.
But in an echo of teaser-rate subprimes here in the US, there is a problem. Along came the synchronized global recession and large Polish current-account trade deficits, which were three times those of the US in terms of GDP, just to give us some perspective. Of course, if you are not a reserve currency this is going to bring some pressure to bear. And it did. The Polish zloty has basically dropped in half compared to the Swiss franc. That means if you are a mortgage holder, your house payment just doubled. That same story is repeated all over the Baltics and Eastern Europe.
Austrian banks have lent $289 billion (230 billion euros) to Eastern Europe. That is 70% of Austrian GDP. Much of it is in Swiss francs they borrowed from Swiss banks. Even a 10% impairment (highly optimistic) would bankrupt the Austrian financial system, says the Austrian finance minister, Joseph Proll. In the US we speak of banks that are too big to be allowed to fail. But the reality is that we could nationalize them if we needed to do so. (And for the record, I favor nationalization and swift privatization. We cannot afford a repeat of Japan's zombie banks.)
The problem is that in Europe there are many banks that are simply too big to save. The size of the banks in terms of the GDP of the country in which they are domiciled is all out of proportion. For my American readers, it would be as if the bank bailout package were in excess of $14 trillion (give or take a few trillion). In essence, there are small countries which have very large banks (relatively speaking) that have gone outside their own borders to make loans and have done so at levels of leverage which are far in excess of the most leveraged US banks. The ability of the "host" countries to nationalize their banks is simply not there. They are going to have to have help from larger countries. But as we will see below, that help is problematical.
As John Mauldin explains, fixing the problem in Europe will be even more difficult than it is here:
This has the potential to be a real crisis, far worse than in the US. Without concerted action on the part of the ECB and the European countries that are relatively strong, much of Europe could fall further into what would feel like a depression. There is a problem, though. Imagine being a politician in Germany, for instance. Your GDP is down by 8% last quarter. Unemployment is rising. Budgets are under pressure, as tax collections are down. And you are going to be asked to vote in favor of bailing out (pick a small country)? What will the voters who put you into office think?
We are going to find out this year whether the European Union is like the Three Musketeers. Are they "all for one and one for all?" or is it every country for itself? My bet (or hope) is that it is the former. Dissolution at this point would be devastating for all concerned, and for the world economy at large. Many of us in the US don't think much about Europe or the rest of the world, but without a healthy Europe, much of our world trade would vanish.
However, getting all the parties to agree on what to do will take some serious leadership, which does not seem to be in evidence at this point. The US almost waited too long to respond to our crisis, but we had the "luxury" of only needing to get a few people to agree as to the nature of the problems (whether they were wrong or right is beside the point). And we have a central bank that could act decisively.
As I understand the European agreement, that situation does not exist in Europe. For the ECB to print money as the US and the UK (and much of the non-EU developed world) will do, takes agreement from all the member countries, and right now it appears the German and Dutch governments are resisting such an idea.
As I write this (on a plane on my way to Orlando) German finance minister Peer Steinbruck has said it would be intolerable to let fellow EMU members fall victim to the global financial crisis. "We have a number of countries in the eurozone that are clearly getting into trouble on their payments," he said. "Ireland is in a very difficult situation.
"The euro-region treaties don't foresee any help for insolvent states, but in reality the others would have to rescue those running into difficulty."
That is a hopeful sign. Ireland is indeed in dire straits, and is particularly vulnerable as it is going to have to spend a serious percentage of its GDP on bailing out its banks.
It is not clear how it will all play out. But there is real risk of Europe dragging the world into a longer, darker night. Their banks not only have exposure to our US foibles, much of which has already been written off, but now many banks will have to contend with massive losses from emerging-market loans, which could be even larger than the losses stemming from US problems. Plus, they are more leveraged.
(Subscribe to John Mauldin's newsletter here >)
http://finance.yahoo.com/tech-ticker/article/195065/Europe's-Crisis-Much-Bigger-Than-Subprime-Worse-Than-U.S.?tickers=ubs%20%20,cs,db,hbc
Posted Feb 27, 2009 08:00am EST
by Henry Blodget
John Mauldin, president of Millennium Wave Advisors, was among the few analysts whose forecasts for 2008 proved accurate. Mauldin, author of the popular "Thoughts from the Frontline" e-letter, joined us to discuss the economic situation in Eastern Europe.
Scroll down to read highlights from Mauldin's analysis, and click "more" to embed the video.
From The Business Insider:
If you think things are bad here, take a quick peek at what's going on across the pond:
The Telegraph: Stephen Jen, currency chief at Morgan Stanley, said Eastern Europe has borrowed $1.7 trillion abroad, much on short-term maturities. It must repay – or roll over – $400bn this year, equal to a third of the region's GDP. Good luck. The credit window has slammed shut.
Not even Russia can easily cover the $500bn dollar debts of its oligarchs while oil remains near $33 a barrel. The budget is based on Urals crude at $95. Russia has bled 36pc of its foreign reserves since August defending the rouble.
"This is the largest run on a currency in history," said Mr Jen.
In Poland, 60pc of mortgages are in Swiss francs. The zloty has just halved against the franc. Hungary, the Balkans, the Baltics, and Ukraine are all suffering variants of this story. As an act of collective folly – by lenders and borrowers – it matches America's sub-prime debacle. There is a crucial difference, however. European banks are on the hook for both. US banks are not.
Almost all East bloc debts are owed to West Europe, especially Austrian, Swedish, Greek, Italian, and Belgian banks. En plus, Europeans account for an astonishing 74pc of the entire $4.9 trillion portfolio of loans to emerging markets.
They are five times more exposed to this latest bust than American or Japanese banks, and they are 50pc more leveraged (IMF data).
Spain is up to its neck in Latin America, which has belatedly joined the slump (Mexico's car output fell 51pc in January, and Brazil lost 650,000 jobs in one month). Britain and Switzerland are up to their necks in Asia.
Whether it takes months, or just weeks, the world is going to discover that Europe's financial system is sunk, and that there is no EU Federal Reserve yet ready to act as a lender of last resort or to flood the markets with emergency stimulus.
A note from Strategic Energy, as quoted by John Mauldin:
"The sums needed are beyond the limits of the IMF, which has already bailed out Hungary, Ukraine, Latvia, Belarus, Iceland, and Pakistan -- and Turkey next -- and is fast exhausting its own $200bn (€155bn) reserve. We are nearing the point where the IMF may have to print money for the world, using arcane powers to issue Special Drawing Rights. Its $16bn rescue of Ukraine has unravelled. The country -- facing a 12% contraction in GDP after the collapse of steel prices -- is hurtling towards default, leaving Unicredit, Raffeisen and ING in the lurch. Pakistan wants another $7.6bn. Latvia's central bank governor has declared his economy "clinically dead" after it shrank 10.5% in the fourth quarter. Protesters have smashed the treasury and stormed parliament.
"'This is much worse than the East Asia crisis in the 1990s,' said Lars Christensen, at Danske Bank. 'There are accidents waiting to happen across the region, but the EU institutions don't have any framework for dealing with this. The day they decide not to save one of these one countries will be the trigger for a massive crisis with contagion spreading into the EU.' Europe is already in deeper trouble than the ECB or EU leaders ever expected. Germany contracted at an annual rate of 8.4% in the fourth quarter. If Deutsche Bank is correct, the economy will have shrunk by nearly 9% before the end of this year. This is the sort of level that stokes popular revolt.
"The implications are obvious. Berlin is not going to rescue Ireland, Spain, Greece and Portugal as the collapse of their credit bubbles leads to rising defaults, or rescue Italy by accepting plans for EU "union bonds" should the debt markets take fright at the rocketing trajectory of Italy's public debt (hitting 112pc of GDP next year, just revised up from 101pc -- big change), or rescue Austria from its Habsburg adventurism. So we watch and wait as the lethal brush fires move closer. If one spark jumps across the eurozone line, we will have global systemic crisis within days. Are the firemen ready?"
This is why some folks think the dollar is going to remain strong over the coming months: Because the rest of the world is falling apart even faster than we are.
Just as the global economy wasn't "decoupled" at the beginning of 2007, however (when the majority of Wall Street strategists believed that it was), it's not "decoupled" now. So the collapse of Eastern Europe--and, with it, the Western European banks--would almost certainly jump across the pond.
John Mauldin summarizes:
Eastern Europe has borrowed an estimated $1.7 trillion, primarily from Western European banks. And much of Eastern Europe is already in a deep recession bordering on depression. A great deal of that $1.7 trillion is at risk, especially the portion that is in Swiss francs. It is a story that could easily be as big as the US subprime problem.
In Poland, as an example, 60% of mortgages are in Swiss francs. When times are good and currencies are stable, it is nice to have a low-interest Swiss mortgage. And as a requirement for joining the euro currency union, Poland has been required to keep its currency stable against the euro. This gave borrowers comfort that they could borrow at low interest in francs or euros, rather than at much higher local rates.
But in an echo of teaser-rate subprimes here in the US, there is a problem. Along came the synchronized global recession and large Polish current-account trade deficits, which were three times those of the US in terms of GDP, just to give us some perspective. Of course, if you are not a reserve currency this is going to bring some pressure to bear. And it did. The Polish zloty has basically dropped in half compared to the Swiss franc. That means if you are a mortgage holder, your house payment just doubled. That same story is repeated all over the Baltics and Eastern Europe.
Austrian banks have lent $289 billion (230 billion euros) to Eastern Europe. That is 70% of Austrian GDP. Much of it is in Swiss francs they borrowed from Swiss banks. Even a 10% impairment (highly optimistic) would bankrupt the Austrian financial system, says the Austrian finance minister, Joseph Proll. In the US we speak of banks that are too big to be allowed to fail. But the reality is that we could nationalize them if we needed to do so. (And for the record, I favor nationalization and swift privatization. We cannot afford a repeat of Japan's zombie banks.)
The problem is that in Europe there are many banks that are simply too big to save. The size of the banks in terms of the GDP of the country in which they are domiciled is all out of proportion. For my American readers, it would be as if the bank bailout package were in excess of $14 trillion (give or take a few trillion). In essence, there are small countries which have very large banks (relatively speaking) that have gone outside their own borders to make loans and have done so at levels of leverage which are far in excess of the most leveraged US banks. The ability of the "host" countries to nationalize their banks is simply not there. They are going to have to have help from larger countries. But as we will see below, that help is problematical.
As John Mauldin explains, fixing the problem in Europe will be even more difficult than it is here:
This has the potential to be a real crisis, far worse than in the US. Without concerted action on the part of the ECB and the European countries that are relatively strong, much of Europe could fall further into what would feel like a depression. There is a problem, though. Imagine being a politician in Germany, for instance. Your GDP is down by 8% last quarter. Unemployment is rising. Budgets are under pressure, as tax collections are down. And you are going to be asked to vote in favor of bailing out (pick a small country)? What will the voters who put you into office think?
We are going to find out this year whether the European Union is like the Three Musketeers. Are they "all for one and one for all?" or is it every country for itself? My bet (or hope) is that it is the former. Dissolution at this point would be devastating for all concerned, and for the world economy at large. Many of us in the US don't think much about Europe or the rest of the world, but without a healthy Europe, much of our world trade would vanish.
However, getting all the parties to agree on what to do will take some serious leadership, which does not seem to be in evidence at this point. The US almost waited too long to respond to our crisis, but we had the "luxury" of only needing to get a few people to agree as to the nature of the problems (whether they were wrong or right is beside the point). And we have a central bank that could act decisively.
As I understand the European agreement, that situation does not exist in Europe. For the ECB to print money as the US and the UK (and much of the non-EU developed world) will do, takes agreement from all the member countries, and right now it appears the German and Dutch governments are resisting such an idea.
As I write this (on a plane on my way to Orlando) German finance minister Peer Steinbruck has said it would be intolerable to let fellow EMU members fall victim to the global financial crisis. "We have a number of countries in the eurozone that are clearly getting into trouble on their payments," he said. "Ireland is in a very difficult situation.
"The euro-region treaties don't foresee any help for insolvent states, but in reality the others would have to rescue those running into difficulty."
That is a hopeful sign. Ireland is indeed in dire straits, and is particularly vulnerable as it is going to have to spend a serious percentage of its GDP on bailing out its banks.
It is not clear how it will all play out. But there is real risk of Europe dragging the world into a longer, darker night. Their banks not only have exposure to our US foibles, much of which has already been written off, but now many banks will have to contend with massive losses from emerging-market loans, which could be even larger than the losses stemming from US problems. Plus, they are more leveraged.
(Subscribe to John Mauldin's newsletter here >)
http://finance.yahoo.com/tech-ticker/article/195065/Europe's-Crisis-Much-Bigger-Than-Subprime-Worse-Than-U.S.?tickers=ubs%20%20,cs,db,hbc
Thursday, 19 February 2009
Eastern European crisis may put us all in the goulash
From The TimesFebruary 19, 2009
Eastern European crisis may put us all in the goulash
Ian King, Deputy Business Editor
After building quietly for months, the next stage of the global financial crisis is upon us, with the economies of Eastern Europe the latest to be hit. Hungary's stock market fell by 7 per cent yesterday and its Czech equivalent by nearly 4 per cent - while Poland, earlier down by almost six 6 per cent, rallied only once Warsaw had sold some of its euros on foreign exchange markets to prop up the zloty.
The trigger for this chaos was comments on Tuesday from Moody's and Standard & Poor's, the ratings agencies, articulating the concerns many observers have had in recent months. Having enjoyed a boom in the past decade, demand for the region's exports has collapsed and investment with it, while job losses are rising - one reason why not all the Poles have yet left Britain for home.
All this means that doubts over whether the governments and companies of Central and Eastern Europe will be able to service their debts are very much to the fore. Much of the borrowing in these countries during the bubble was not done in their own currencies but in others, such as the euro and the Swiss franc, which means that there will almost certainly be defaults.
The zloty, for example, has lost a third of its value against the euro since last summer, with Hungary's forint down 23 per cent and the Czech crown down by about 17 per cent in the same period.
The impact of these debt defaults will be felt fiercely in some Western European economies, particularly Austria, whose banks have lent the equivalent of a quarter of the country's GDP to the region. Sweden's banks are also heavily exposed. Consultancy Capital Economics calculates that Swedish banks have lent $90 billion (£63 billion) - nearly one fifth of Sweden's GDP - to “high-risk” countries, mainly in the Baltics, while the banking systems of many of the worst-hit economies, including those of Estonia, Slovakia and Lithuania, are now almost entirely foreign-owned.
While Raiffeisen and Erste Bank, of Austria, are regarded as the two institutions most significantly at risk, it is not just the Viennese who risk seeing their capital waltz off into oblivion. ING, the Dutch bank, Commerzbank, of Germany, and Société Générale, of France - which owns the Russian Rosbank - all saw their shares fall yesterday amid mounting concerns over their exposure to the region. Italy's UniCredit and Belgium's KBC are also heavily exposed.
Apart from the damage to some Western European banks, other companies may also be wounded, such as Telekom Austria, which expanded east amid tough competition in their home markets. And there are other ways in which contagion could spread. Manufacturers in Germany - the linchpin of that country's economy - will suffer as Eastern European rivals enjoy a boost in competitiveness as their currencies collapse in value against the euro.
The bursting of this bubble may damage Britain less severely than other EU nations. While Irish buy-to-let investors were buying up most of Bratislava, Austrian banks were buying their Romanian equivalents and German and French manufacturers were opening plants from Bucharest to Brno, the only British activity in the region seemed to consist of flying to such locations for stag weekends.
That is not to say that this crisis will not drop us in the goulash, too. The crisis was already highlighting the inflexibility of eurozone membership, particularly for those less competitive member states such as Italy and Portugal, who - unlike Britain and Sweden - are unable to devalue their way out of their problems. This has not gone unnoticed - and, in a speech last night, Lorenzo Bini Smaghi, the ECB executive board member, was muttering ominously that the ability of some EU countries to devalue their currency, gaining an economic advantage, was putting the single market's integrity at risk.
Taken to their logical conclusion, his comments sound dangerously like a call to protectionism.
http://business.timesonline.co.uk/tol/business/columnists/article5762544.ece
Eastern European crisis may put us all in the goulash
Ian King, Deputy Business Editor
After building quietly for months, the next stage of the global financial crisis is upon us, with the economies of Eastern Europe the latest to be hit. Hungary's stock market fell by 7 per cent yesterday and its Czech equivalent by nearly 4 per cent - while Poland, earlier down by almost six 6 per cent, rallied only once Warsaw had sold some of its euros on foreign exchange markets to prop up the zloty.
The trigger for this chaos was comments on Tuesday from Moody's and Standard & Poor's, the ratings agencies, articulating the concerns many observers have had in recent months. Having enjoyed a boom in the past decade, demand for the region's exports has collapsed and investment with it, while job losses are rising - one reason why not all the Poles have yet left Britain for home.
All this means that doubts over whether the governments and companies of Central and Eastern Europe will be able to service their debts are very much to the fore. Much of the borrowing in these countries during the bubble was not done in their own currencies but in others, such as the euro and the Swiss franc, which means that there will almost certainly be defaults.
The zloty, for example, has lost a third of its value against the euro since last summer, with Hungary's forint down 23 per cent and the Czech crown down by about 17 per cent in the same period.
The impact of these debt defaults will be felt fiercely in some Western European economies, particularly Austria, whose banks have lent the equivalent of a quarter of the country's GDP to the region. Sweden's banks are also heavily exposed. Consultancy Capital Economics calculates that Swedish banks have lent $90 billion (£63 billion) - nearly one fifth of Sweden's GDP - to “high-risk” countries, mainly in the Baltics, while the banking systems of many of the worst-hit economies, including those of Estonia, Slovakia and Lithuania, are now almost entirely foreign-owned.
While Raiffeisen and Erste Bank, of Austria, are regarded as the two institutions most significantly at risk, it is not just the Viennese who risk seeing their capital waltz off into oblivion. ING, the Dutch bank, Commerzbank, of Germany, and Société Générale, of France - which owns the Russian Rosbank - all saw their shares fall yesterday amid mounting concerns over their exposure to the region. Italy's UniCredit and Belgium's KBC are also heavily exposed.
Apart from the damage to some Western European banks, other companies may also be wounded, such as Telekom Austria, which expanded east amid tough competition in their home markets. And there are other ways in which contagion could spread. Manufacturers in Germany - the linchpin of that country's economy - will suffer as Eastern European rivals enjoy a boost in competitiveness as their currencies collapse in value against the euro.
The bursting of this bubble may damage Britain less severely than other EU nations. While Irish buy-to-let investors were buying up most of Bratislava, Austrian banks were buying their Romanian equivalents and German and French manufacturers were opening plants from Bucharest to Brno, the only British activity in the region seemed to consist of flying to such locations for stag weekends.
That is not to say that this crisis will not drop us in the goulash, too. The crisis was already highlighting the inflexibility of eurozone membership, particularly for those less competitive member states such as Italy and Portugal, who - unlike Britain and Sweden - are unable to devalue their way out of their problems. This has not gone unnoticed - and, in a speech last night, Lorenzo Bini Smaghi, the ECB executive board member, was muttering ominously that the ability of some EU countries to devalue their currency, gaining an economic advantage, was putting the single market's integrity at risk.
Taken to their logical conclusion, his comments sound dangerously like a call to protectionism.
http://business.timesonline.co.uk/tol/business/columnists/article5762544.ece
Tuesday, 17 February 2009
Europe has reached acute danger point.
Failure to save East Europe will lead to worldwide meltdown
The unfolding debt drama in Russia, Ukraine, and the EU states of Eastern Europe has reached acute danger point.
By Ambrose Evans-Pritchard
Last Updated: 2:05AM GMT 15 Feb 2009
Comments 91 Comment on this article
If mishandled by the world policy establishment, this debacle is big enough to shatter the fragile banking systems of Western Europe and set off round two of our financial Götterdämmerung.
Austria's finance minister Josef Pröll made frantic efforts last week to put together a €150bn rescue for the ex-Soviet bloc. Well he might. His banks have lent €230bn to the region, equal to 70pc of Austria's GDP.
"A failure rate of 10pc would lead to the collapse of the Austrian financial sector," reported Der Standard in Vienna. Unfortunately, that is about to happen.
The European Bank for Reconstruction and Development (EBRD) says bad debts will top 10pc and may reach 20pc. The Vienna press said Bank Austria and its Italian owner Unicredit face a "monetary Stalingrad" in the East.
Mr Pröll tried to drum up support for his rescue package from EU finance ministers in Brussels last week. The idea was scotched by Germany's Peer Steinbrück. Not our problem, he said. We'll see about that.
Stephen Jen, currency chief at Morgan Stanley, said Eastern Europe has borrowed $1.7 trillion abroad, much on short-term maturities. It must repay – or roll over – $400bn this year, equal to a third of the region's GDP. Good luck. The credit window has slammed shut.
Not even Russia can easily cover the $500bn dollar debts of its oligarchs while oil remains near $33 a barrel. The budget is based on Urals crude at $95. Russia has bled 36pc of its foreign reserves since August defending the rouble.
"This is the largest run on a currency in history," said Mr Jen.
In Poland, 60pc of mortgages are in Swiss francs. The zloty has just halved against the franc. Hungary, the Balkans, the Baltics, and Ukraine are all suffering variants of this story. As an act of collective folly – by lenders and borrowers – it matches America's sub-prime debacle. There is a crucial difference, however. European banks are on the hook for both. US banks are not.
Almost all East bloc debts are owed to West Europe, especially Austrian, Swedish, Greek, Italian, and Belgian banks. En plus, Europeans account for an astonishing 74pc of the entire $4.9 trillion portfolio of loans to emerging markets.
They are five times more exposed to this latest bust than American or Japanese banks, and they are 50pc more leveraged (IMF data).
Spain is up to its neck in Latin America, which has belatedly joined the slump (Mexico's car output fell 51pc in January, and Brazil lost 650,000 jobs in one month). Britain and Switzerland are up to their necks in Asia.
Whether it takes months, or just weeks, the world is going to discover that Europe's financial system is sunk, and that there is no EU Federal Reserve yet ready to act as a lender of last resort or to flood the markets with emergency stimulus.
Under a "Taylor Rule" analysis, the European Central Bank already needs to cut rates to zero and then purchase bonds and Pfandbriefe on a huge scale. It is constrained by geopolitics – a German-Dutch veto – and the Maastricht Treaty.
But I digress. It is East Europe that is blowing up right now. Erik Berglof, EBRD's chief economist, told me the region may need €400bn in help to cover loans and prop up the credit system.
Europe's governments are making matters worse. Some are pressuring their banks to pull back, undercutting subsidiaries in East Europe. Athens has ordered Greek banks to pull out of the Balkans.
The sums needed are beyond the limits of the IMF, which has already bailed out Hungary, Ukraine, Latvia, Belarus, Iceland, and Pakistan – and Turkey next – and is fast exhausting its own $200bn (€155bn) reserve. We are nearing the point where the IMF may have to print money for the world, using arcane powers to issue Special Drawing Rights.
Its $16bn rescue of Ukraine has unravelled. The country – facing a 12pc contraction in GDP after the collapse of steel prices – is hurtling towards default, leaving Unicredit, Raffeisen and ING in the lurch. Pakistan wants another $7.6bn. Latvia's central bank governor has declared his economy "clinically dead" after it shrank 10.5pc in the fourth quarter. Protesters have smashed the treasury and stormed parliament.
"This is much worse than the East Asia crisis in the 1990s," said Lars Christensen, at Danske Bank.
"There are accidents waiting to happen across the region, but the EU institutions don't have any framework for dealing with this. The day they decide not to save one of these one countries will be the trigger for a massive crisis with contagion spreading into the EU."
Europe is already in deeper trouble than the ECB or EU leaders ever expected. Germany contracted at an annual rate of 8.4pc in the fourth quarter.
If Deutsche Bank is correct, the economy will have shrunk by nearly 9pc before the end of this year. This is the sort of level that stokes popular revolt.
The implications are obvious. Berlin is not going to rescue Ireland, Spain, Greece and Portugal as the collapse of their credit bubbles leads to rising defaults, or rescue Italy by accepting plans for EU "union bonds" should the debt markets take fright at the rocketing trajectory of Italy's public debt (hitting 112pc of GDP next year, just revised up from 101pc – big change), or rescue Austria from its Habsburg adventurism.
So we watch and wait as the lethal brush fires move closer.
If one spark jumps across the eurozone line, we will have global systemic crisis within days. Are the firemen ready?
http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/4623525/Failure-to-save-East-Europe-will-lead-to-worldwide-meltdown.html
The unfolding debt drama in Russia, Ukraine, and the EU states of Eastern Europe has reached acute danger point.
By Ambrose Evans-Pritchard
Last Updated: 2:05AM GMT 15 Feb 2009
Comments 91 Comment on this article
If mishandled by the world policy establishment, this debacle is big enough to shatter the fragile banking systems of Western Europe and set off round two of our financial Götterdämmerung.
Austria's finance minister Josef Pröll made frantic efforts last week to put together a €150bn rescue for the ex-Soviet bloc. Well he might. His banks have lent €230bn to the region, equal to 70pc of Austria's GDP.
"A failure rate of 10pc would lead to the collapse of the Austrian financial sector," reported Der Standard in Vienna. Unfortunately, that is about to happen.
The European Bank for Reconstruction and Development (EBRD) says bad debts will top 10pc and may reach 20pc. The Vienna press said Bank Austria and its Italian owner Unicredit face a "monetary Stalingrad" in the East.
Mr Pröll tried to drum up support for his rescue package from EU finance ministers in Brussels last week. The idea was scotched by Germany's Peer Steinbrück. Not our problem, he said. We'll see about that.
Stephen Jen, currency chief at Morgan Stanley, said Eastern Europe has borrowed $1.7 trillion abroad, much on short-term maturities. It must repay – or roll over – $400bn this year, equal to a third of the region's GDP. Good luck. The credit window has slammed shut.
Not even Russia can easily cover the $500bn dollar debts of its oligarchs while oil remains near $33 a barrel. The budget is based on Urals crude at $95. Russia has bled 36pc of its foreign reserves since August defending the rouble.
"This is the largest run on a currency in history," said Mr Jen.
In Poland, 60pc of mortgages are in Swiss francs. The zloty has just halved against the franc. Hungary, the Balkans, the Baltics, and Ukraine are all suffering variants of this story. As an act of collective folly – by lenders and borrowers – it matches America's sub-prime debacle. There is a crucial difference, however. European banks are on the hook for both. US banks are not.
Almost all East bloc debts are owed to West Europe, especially Austrian, Swedish, Greek, Italian, and Belgian banks. En plus, Europeans account for an astonishing 74pc of the entire $4.9 trillion portfolio of loans to emerging markets.
They are five times more exposed to this latest bust than American or Japanese banks, and they are 50pc more leveraged (IMF data).
Spain is up to its neck in Latin America, which has belatedly joined the slump (Mexico's car output fell 51pc in January, and Brazil lost 650,000 jobs in one month). Britain and Switzerland are up to their necks in Asia.
Whether it takes months, or just weeks, the world is going to discover that Europe's financial system is sunk, and that there is no EU Federal Reserve yet ready to act as a lender of last resort or to flood the markets with emergency stimulus.
Under a "Taylor Rule" analysis, the European Central Bank already needs to cut rates to zero and then purchase bonds and Pfandbriefe on a huge scale. It is constrained by geopolitics – a German-Dutch veto – and the Maastricht Treaty.
But I digress. It is East Europe that is blowing up right now. Erik Berglof, EBRD's chief economist, told me the region may need €400bn in help to cover loans and prop up the credit system.
Europe's governments are making matters worse. Some are pressuring their banks to pull back, undercutting subsidiaries in East Europe. Athens has ordered Greek banks to pull out of the Balkans.
The sums needed are beyond the limits of the IMF, which has already bailed out Hungary, Ukraine, Latvia, Belarus, Iceland, and Pakistan – and Turkey next – and is fast exhausting its own $200bn (€155bn) reserve. We are nearing the point where the IMF may have to print money for the world, using arcane powers to issue Special Drawing Rights.
Its $16bn rescue of Ukraine has unravelled. The country – facing a 12pc contraction in GDP after the collapse of steel prices – is hurtling towards default, leaving Unicredit, Raffeisen and ING in the lurch. Pakistan wants another $7.6bn. Latvia's central bank governor has declared his economy "clinically dead" after it shrank 10.5pc in the fourth quarter. Protesters have smashed the treasury and stormed parliament.
"This is much worse than the East Asia crisis in the 1990s," said Lars Christensen, at Danske Bank.
"There are accidents waiting to happen across the region, but the EU institutions don't have any framework for dealing with this. The day they decide not to save one of these one countries will be the trigger for a massive crisis with contagion spreading into the EU."
Europe is already in deeper trouble than the ECB or EU leaders ever expected. Germany contracted at an annual rate of 8.4pc in the fourth quarter.
If Deutsche Bank is correct, the economy will have shrunk by nearly 9pc before the end of this year. This is the sort of level that stokes popular revolt.
The implications are obvious. Berlin is not going to rescue Ireland, Spain, Greece and Portugal as the collapse of their credit bubbles leads to rising defaults, or rescue Italy by accepting plans for EU "union bonds" should the debt markets take fright at the rocketing trajectory of Italy's public debt (hitting 112pc of GDP next year, just revised up from 101pc – big change), or rescue Austria from its Habsburg adventurism.
So we watch and wait as the lethal brush fires move closer.
If one spark jumps across the eurozone line, we will have global systemic crisis within days. Are the firemen ready?
http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/4623525/Failure-to-save-East-Europe-will-lead-to-worldwide-meltdown.html
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