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.
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.
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.
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got bullets
ReplyDeleteI think this is a bit overblown. Europe is not in worse shape than the U.S. They are getting punished for buying up so much toxic U.S. debt, but they still have production and manufacturing to rebuild with once the dollar implodes. The U.S., on the other hand, has nothing and most will live like serfs.
ReplyDeletepasserby...and whom will they be exporting these products too if they can't feed the economic pig known as the U.S.? Globalization has insured we ALL fail.
ReplyDeleteI agree they are trying to change the scene over to Europe for a few days. Next week back to N. America, we have the whole world covered don't worry. We all will be sinking just depends which part of the boat your in..
ReplyDeleteMorpheus, what you are explaining is a common misconception -- that the U.S. economy is the engine of world economic activity. The whole world will be affected as long as everyone is tied to the dollar and think they need to support it. Eventually, the dollar will sink, Europe and Asia will re-allocate resources domestically, and the U.S. will suffer the most.
ReplyDeleteIn the meantime, everyone will get pummeled.
passerby..I was addressing your "but they still have production and manufacturing to rebuild..." comment. 25% of GDP in the world is the U.S. The majority of manufactured goods ends up more there than anywhere else. Who will be importing all these E.U. goods when the States are toast. You are correct. The U.S. being the world currency will come to an end but if you think Asia and Europe's economy will survive without exports to the States your mistaken. Yes. Everybody is screwed. LIke I said, Globalization has assured that.
ReplyDeleteGlobalization = fancy term to exploit underdeveloped nation workforces and resources in the guise of "evolved" forms of enterprise while simultaneously robbing citizens of capital within developed nations via manifold ponzi schemes known to legislators as preferable programs for constituents and mostly, campaign supporters.
ReplyDeleteMorpheus, you're only looking at the issue from one angle, i.e. that the U.S. can be the only consumer of all these goods. Just because they have been doesn't they have to be.
ReplyDeleteAsia and India have roughly 2.5 billion people. Europe has 500 million. Only because of funny money and reckless consumption has the U.S. been the gluttonous consumer of all these goods. But, they can't pay for them anymore and thus nobody will feed them anymore (when the dollar crashes). Asia and Europe once they decouple from the dollar will re-direct those goods to themselves. If you follow Michael Panzner, globalization may well be dead.
It's a silly notion to think the U.S. (a country of 300 million) must be the primary consumer of goods produced by almost 3 billion people.
Passerby, India and China's middle class which is essential to consumerism is no where close to developed enough to pick up the slack. China's middle class is roughly the same size as the U.S. at 100 million but at the moment at least, do not have the same standard of living or wages. Nominal population is irrelavant. Wages and standards of living have to go way up in both countries before they can have a viable middle class consumer base for imports. I agree globalization is dead but not only because of what posters have said. Mainly because it creates artificial regional blocks of specialization which are unsustainable and go against free markets. The U.S. has been the financial capital of the world with respect to Wall Street. China does most of the manufacturing of cheap goods. The far east manufacturers and higher end goods mainly technology. Middle east for oil. Canada for raw materials. There is too much interdependency and not enough economic autonomy amoung individual nations but yet still with cooperation with respect to trade. Again, as silly as you think it is when you remove 25% of the global economy you just don't snap your fingers and presto chango everyone else picks up the slack. That would take a generation to achieve.
ReplyDeleteI never said anything about this transition being a wave of the wand and everything magically changes. I'm talking about a long-term projection -- probably at least a few years away. Up and until that point, the meltdown of the worldwide economy will continue.
ReplyDeleteBut, again, you're only looking at it in terms of how it is functioning NOW, where everyone is tied to the dollar, where everyone has been exposed to the United States' excesses and toxic debt, and where they all must absorb those losses.
I agree with you regarding the reasons for the decline of globalization, but I would also add mainly that there will be so much strife and chaos in individual countries that governments will be forced to penny-pinch and use their resources for their own countries.
Where will these burgeoning continents like Asia and Europe get their resources? Well, the U.S. will then be forced to be a net exporter (with its people making slave-like wages), Russia, and Canada are three big producers.
So you're right, it's going to be a few years away. I'm projecting long-term.
Despite the colossal exposure of Austrian banks to loans made in euros to Eastern European countries on which high defaults are inevitable which could wipe out the Austrian financial sector, nobody in Austria seems to be the least bit worried. When you walk into an Austrian bank, the bank's employees act as though the year 2008 never took place!
ReplyDeleteA global shift like that in the middle of a Depression isn't going to take a few years anymore more than it took a few years for the U.S. to go from a creditor exporting nation to a debtor importing nation with a phony service economy and a bloated wall street. It takes decades.
ReplyDeleteAsia only became "burgeoning" when multinational U.S. corporations set up shop there to bypass paying their people good wages, absorb the profits from Asia's cheap labour and sell them what American citizens should have made in the first place back to them. Doing so at the price that would be consistent with there stagnant incomes.
Again, this is a 10+ year Depression we are talking about here. Who exactly are these Asian/European countries going to be selling to, with Global GDP shrinking and global unemployment rising out of control and zombie banks that cannot grease this debt-based system with credit.
Without denigrating into ad hominem attacks, I don't think you're getting it : ) For starters, I said AT LEAST a few years. Second of all, all of the depression characteristics you're referring to (rampant unemployment, shrinking GDP, zombie banks etc.) are so because of the current economic climate.
ReplyDeleteWhere is all the capital flowing? Asia. Where are all the resources starting to go? Asia. Who is starting to demand a higher standard of living as they industrialize? Asians. All of these big corporations have moved there not just because there are cheap wages to exploit, but because it's the next hotbed of economic growth. It is only because they have to swallow all of the bad debt, worthless t-bills, and now abandoned American consumerism that they have to adjust. China, especially, will develop internal means of distribution and infrastructure. They're sitting on hoards of gold and some cash ready to spend on their own development. But, right now, they haven't developed domestic channels of distribution and so people are losing their jobs left and right. They will be among the quickest to recover from this depression.
Who will they be selling to? Themselves...once they can shed themselves of the American parasite and focus on their own economies, in which they have the infrastructure to sustain.
Look at it this way: Who is going to keep feeding American consumption when everyone in their right mind now knows they can't pay for it? How will Americans continue to sustain this behavior? The answer is nobody, and they can't. Watch how fast things spiral out of control for the U.S. once the dollar collapses.
How long will it take? Who knows. 4 years. 5 years. 10 years. I see the American economy taking at least a decade or two to recover, while Europe and Asia will rebound much faster.
This isn't just MY opinion. These are the prognostications of economic forecasters Peter Schiff, Jim Rogers, Marc Faber, etc. And hey, I listen to the people who have predicted this whole thing unfold.
Brother can you spare a Euro?
ReplyDeleteAll the capital is actual flowing to U.S. treasuries which is causing a bond bubble which will manifest itself into the dollar crash you've been talking about. It's not going to corporations or other countries right now. That's the big problem.
ReplyDeleteYes. You said at least a few years. I'm saying at least a decade. Semantics perhaps but your assumption is still that a few years is possible and I'm saying it's physically impossible.
I agree with your assertion of American's collapse. We are on the same page there. Empire's fall when they get complacent and lazy and the U.S. is no different. And I agree that China, India and South East Asia in general will benefit along with the middle east which the U.S. is desparately trying to get control of to sustain there empire. But again this will take a decade...two decades even...not at LEAST a few years.
I'm familiar with Schiff, Faber, Rogers, and you forgot Roubini and there prognastications. Keep in mind Rogers and Schiff in particular have their own agendas because there funds are massively directed in the Asian markets. That said, I agree with a lot of what they have to say.
Bottom line, NO ONE is recovering quickly from this depression. It's just some nations will never recover to where they were prior to the collapse ie. U.S and others will eventually replace the U.S. as the economic engine of the world. Let's all hope the Chinese are a thriving democracy by then or we'll all be speaking Mandarin and making pennies a day.
China is taking their dollar holdings and buying up U.S. assets and of course gold. I don't for a second think China is going to be a benevolent empire spreading democracy. I believe they are being groomed as the new model of world empire. They have enough population to foot the soldiers.
ReplyDeleteOverall, it sounds like we're basically in agreement. We are swimming in unchartered waters, so to me, these predictions are best guesses based on the evidence. I do agree with you that nobody is recovering quickly from this. I'm just saying (as Jim Rogers would say) the places that will come out of this the fastest are the ones where the fundamentals are unimpaired.
It's true, empires fall when they get lazy and complacent, but mostly they fall when they can't afford them anymore. Look at the U.S. There is no shortage of military adventures on their radar, but they are simply broke now and transitioning to Asia where they will do the same thing.
Have you been stockpiling gold and silver too?
I'm leary of Gold and Silver because I think Comex is subject to too much manipulation and violent up/down swings..Also, truth be told the American government during the last depression attempted to confiscate people's gold. Gold is so sporatic. It did spike in the early 80's at 850. Do I believe it will go to 2000+ in the next couple years, sure. My question is when people are starving and need the necessities of life but have gold that only the elite truly will pay for at that point. What will it really be worth if they are the only buyers. It is a good hedge but not sure about an investment.
ReplyDeleteYou are correct about the U.S.' overexpansion of there military. 200 years is a good run. It's over.