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.
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