Subprime Europe

[Joanne98]

Washington

THE 1931 collapse of the Austrian bank Creditanstalt provoked financial panic across Europe and almost single-handedly turned a bad downturn into the Great Depression. Last week, when I read about the brewing European banking crisis, I suddenly began to dread that history might be repeating itself.

You might think that my worries are a bit late. After all, losses on subprime mortgages in the United States have already caused a Depression-like banking collapse. Well, believe it or not, Europe’s current crisis is scarier. For while losses on Eastern European debts may be only a small fraction of those on subprime mortgages, the continent’s problems are politically harder to solve, and their consequences may prove to be much worse.

Much as in our subprime mess, Eastern Europe’s problems began with easy credit. From 2004 to 2008 Eastern Europe had its own bubble, fueled by the ready availability of international credit. In recent years countries like Bulgaria and Latvia borrowed annually the equivalent of more than 20 percent of their gross domestic product from abroad. By 2008, 13 countries that were once part of the Soviet empire had accumulated a collective debt to foreign banks or in foreign currencies of more than $1 trillion. Some of the money went into investment, much of it into consumption or real estate.

When the music stopped last year and banks retrenched, the flow of new capital to Eastern Europe came to an abrupt halt, and then reversed direction. This credit crunch hit the region just as its main export markets in Western Europe were going into free fall. Moreover, with so much of the debt denominated in foreign currencies, everyone in Eastern Europe has been scrambling to get their hands on foreign exchange and local currencies have collapsed.

Most of the Eastern European debt is held by Western European banks. It also turned out that some of the biggest lenders to Eastern Europe were Austrian and Italian banks — for example, loans by Austrian banks to Eastern European countries are almost equivalent to 70 percent of Austria’s G.D.P. Now, Italy and Austria can’t afford to bail out even their own banks.

The debt crisis in Eastern Europe is much more than an economic problem. The wrenching decline in the standard of living caused by this crisis is provoking social unrest. American subprime borrowers who have had their houses foreclosed on are not — at least not yet — rioting in the streets. Workers in Eastern Europe are. The roots of democracy in the region are not deep and the specter of right-wing nationalism remains a threat.

http://www.nytimes.com/2009/03/08/opinion/08Ahamed.html?em

It's not RW nationalism they're worried about. It's LW nationalism.

[Idealism]

1. It can go either of those two paths

Russia, if commodity prices rebound, would love to create a neo-Warsaw Pact to counter NATO and to reassert control over their former satellites. If commodity prices don't rebound, I don't see eastern Europe getting bailed out by anyone. Merkel has already publicly hesitated and shot down the idea; it will be politically difficult to get German or French taxpayers to go along with the idea that they need to bail out Latvia, Poland, Lithuania, et al. So if the EU won't do it, Russia won't be able to if oil prices remain $60/barrel lower than what the Kremlin budgeted for, that leaves one possibility: the IMF. The IMFs austerity measures and structural programs will be highly unpopular if they were to even attempt in exchange for loans, but Latvia's government already defaulted a few weeks ago even after receiving billions from the fund. The fund has been depleted due to the global downturn, as they already had to prop up Pakistan, eastern Europe, and others. Their account sits at $150 billion which will not do much to help eastern Europe slide into revolution.

The revolution can go one of two ways: Russian-influenced RW military regime or populist revolt. Either way its going to be ugly.

[amandabeech]

2. Perhaps the French banks can funnel the money they're getting on the pass-through from AIG

to the Eastern Europeans.

Sorry, I've been up all night bashing 20-somethings and at my age I'm getting rather cranky.

Seriously, though, it's a real problem. If the French and Germans won't do anything thorough, it doesn't look good.

I have a new housemate from Ukraine. I tried to talk to him about this, and he refuses. His mother is in Ukraine, but he and his sister managed to land here, working for what I think is a Russian company that reincorporated itself here in the U.S. for obvious reasons. They and her husband, who is a naturalized American from Slovakia (he looks like a former Yugoslav, but what do I know), are trying to figure what to do about the mother and how to keep him here permanently. From the sound of this article, I expect that more from Eastern Europe will try to end up here. If the Indian and Chinese engineers and software types go home, perhaps the Eastern Europeans will replace them.

But enough Amero-centric ramblings. This is a very bad deja vu all over again for a lot of people. Thanks for posting.