You Think Our Credit Crisis is Bad?

You ain’t seen nothing, yet - as Roger Kimball notes and quotes:

For the last few decades, the West has been pumping money into economic backwaters, taking care first to assure everyone that they were “emerging” markets. But what if it turns out that they only seemed to be emerging when propped up by easy capital, in the absence of which some or all of them reverted to being what they always had been, i.e., submerging markets? What then?

“Europe,” Evans-Pritchard observes, 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.” Demise? Iceland? Well, economically, it pretty much amounts to that: as a professor at the university of Iceland put it earlier this month, “Iceland is bankrupt. . . . . The IMF has to come and rescue us.”

But what happened in Iceland was only the beginning. The crash of so-called “emerging markets” is sending shock waves throughout Europe and parts of Asia. Evans-Pritchard sketches the dismal picture:

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. Hence the growing doubts about the health of Spain’s financial system – already under stress from its own property crash – as Argentina spirals towards another default, and Brazil’s currency, bonds and stocks all go into freefall.

Broadly speaking, the US and Japan sat out the emerging market credit boom. The lending spree has been a European play – often using dollar balance sheets, adding another ugly twist as global “deleveraging” causes the dollar to rocket. Nowhere has this been more extreme than in the ex-Soviet bloc.

The region has borrowed $1.6 trillion in dollars, euros, and Swiss francs. A few dare-devil homeowners in Hungary and Latvia took out mortgages in Japanese yen. They have just suffered a 40pc rise in their debt since July. Nobody warned them what happens when the Japanese carry trade goes into brutal reverse, as it does when the cycle turns. . . .

Russia too is in the eye of the storm, despite its energy wealth – or because of it. The cost of insuring Russian sovereign debt through credit default swaps (CDS) surged to 1,200 basis points last week, higher than Iceland’s debt before Götterdammerung struck Reykjavik.

The markets no longer believe that the spending structure of the Russian state is viable as oil threatens to plunge below $60 a barrel. The foreign debt of the oligarchs ($530bn) has surpassed the country’s foreign reserves. Some $47bn has to be repaid over the next two months.

And this leaves out China - which must export massive amounts of cheap consumer goods in order to keep its financial system afloat; cut those exports just a bit - as will certainly happen in the current downturn - and we mat see a Chinese economic meltdown as they are unable to pay their debts, bribe their oligarchs and pay for their military buildup all at once. Something will have to give. Why worry? Because China’s government made a deal with China’s people after Tienamen Square - “leave us in charge, and we’ll shepherd you to economic prosperity”. China falls into economic depression and all bets are off.

Now more than ever we need to elect John McCain - with this economic tsunami raging around the world, we need a President who understands that taxes have to be kept low, that business have to be free to innovate, that the American worker has to be free to compete, that regulations have to protect the public while not straightjacketing business. McCain will be that sort of President - Obama, on the other hand, is already wedded to the Euro-trash socialist model which has placed Europe’s economic head on the chopping block.

Tags: China, EU, Obama Deceptions, recession

14 comments October 26th, 2008

When Economic Worries Grow, People Run Home

To the US dollar:

US stocks soared on Friday as the dollar saw its biggest one-day jump against the euro in eight years and oil prices plunged.

The moves marked a key reversal of a trend that many investors had followed profitably for months – betting that high commodity prices would keep the dollar weak.

The dollar reached its highest in five months against a trade-weighted basket of currencies, while oil fell more than $5 to $114.87, 22 per cent below its record high of $147.27 last month. The S&P 500 closed 2.4 per cent higher in New York.

The shift in sentiment was triggered by Jean-Claude Trichet, president of the European Central Bank, who warned on Thursday that third-quarter eurozone growth would be “particularly weak”. This sparked talk that the ECB would be forced to abandon its hawkish policy stance and start cutting interest rates, thereby weakening the euro.

“This is the watershed week for the US dollar,” said Marc Chandler, currency strategist at Brown Brothers Harriman. “The magnitude of the dollar’s moves and the breaking of key technical levels suggest that a major shift in the outlook towards the dollar is occurring as massive positions are adjusted.” Other analysts described the widespread buying of dollars as “capitulation”.

The dollar hit a five-month high of $1.5055 against the euro and climbed 1.3 per cent to $1.9189 against the pound – its strongest since November 2006.

Traders said the violence of the move was testimony to the extent to which the market had been surprised by economic weakness outside the US.

“Mr Trichet was unable to convince the public that the ECB had not been surprised by the eurozone’s economic downturn,” said Ulrich Leuchtmann at Commerzbank. “Therefore, the last remaining rate hike expectations were taken off the table.”

Why is this? Because if you’re looking for security, there’s nothing quite as good as the American economy and American law - we actually have the highest business ethics in the world (I know, hard to believe, but there it is) as well as very transparant requirements in corporate reporting which makes the investor confident that when he plunks his money into the United States he’ll know where it is and what can happen to it. Couple this with the largest economy in the world (I know, the Eurozone is supposed to be that, but that is mostly a mirage produced by massive Eurozone government spending), and you get the bank of last resort, the United States of America.

Bulwark of liberty, engine of economic growth, bastion of Judeo-Christian civilization - the United States serves many purposes, and with this comes a great responsibility. We simply must protect this great thing, the United States of America. We daren’t negligently throw it away in a bid for shallow popularity - hard as it may be to take, if what the United States must do is protect fools in their folly, then that is what we’ll have to do, in the hopes that the fools will learn wisdom. The people who complain about us the most are those who live most solidly lapped in the wealth and privilege built up by the long peace guarded by the United States (meaning, of course, that it has been because of us that no world war has erupted in the past 60 years). They glory in their wealth and power and know not where it comes from - its not so much biting the hand that feeds them, but biting the hand of a benefactor they don’t even recognise.

Its all good - those who have wisdom and strength are to use it for the benefit of others, and if all we do is what we can for the best, then we’ll have done all that is required of us.

Tags: dollar vs Euro, EU, oil price

6 comments August 9th, 2008