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The long ticking time
bomb of Eastern European debt is starting to explode with an even greater
inevitability as that of subprime mortgages exploding in the United States,
as at least in the United States the determining factor of whether or not the
mortgage market would go bust is the state of the US housing market. With
Eastern Europe the big and obvious question mark that has been raised many
times long before the housing markets peaked and the stock markets crashed
was the degree of borrowing by Eastern Europeans in foreign currencies that
set the borrowers up for the ticking currency time bomb when the forex trends
reversed against them would send the value of debts soaring in the domestic
currencies thus pushing for example the housing borrowers into negative
equity WITHOUT A FALL IN HOUSE PRICES.
This originally
implied that the eastern european governments would be forced to raise
interest rates much higher than they would like to so as to defend their
currencies that weakened against the creditor nations namely the Euro and
Japanese Yen so as to reduce the debt burden on borrowers for if they failed
to do so then the debt levels would explode to levels that would bankrupt the
borrowers both corporate and mortgage borrowers, which would trigger economic
contraction and hence worsen the situation as debt default rates soared.
However now we have
the added problem of the world economy going into a deep economic slump that
has resulted in the collapse of global trade and hence Eastern European
economies are falling off the edge of a cliff as they are hit from all sides,
by currencies collapsing as exports slump and investments being repatriated
back to western countries coupled with the frozen credit markets.
Latvia the Next Iceland?
The situation has
reached such a crisis point in Latvia that anyone that reports on the truth
is being arrested by the Latvian security forces as an omen that economic
turmoil means a return towards tyranny as I wrote of in early December 08 - (Latvia
Protects its Banking System by Arresting Economist For Speaking the Truth),as the Latvian secret
police arrested Dmitrijs Smirnovs, a university professor for delivering
gloomy forecasts on the prospects for the Latvian economy and the state of
the Latvian banking system.
Since then, Latvia has continued its economic and financial
meltdown as evidenced by the 10% slump in GDP as the credit
rating agencies cut the countries credit rating to junk level. Latvia
following the collapse of the soviet union had sought to burn its bridges
with Russia with a view to moving towards the EU, now the EU has shut its
door in the face of its own banking sectors toxic liabilities of $23 trillion that threaten a
collapse of the Euro, Latvia is left a drift on its own seeking an IMF
bailout that itself has gone cap in hand to the EU for more emergency funds.
Not far behind Latvia
are Lithuania and Estonia, which are all along the same path as Latvia having
adopted similar policies of burning their bridges with Russia, which must now
be looking on with gleeful satisfaction. Although the collapse in the crude
oil price has put a severe strain on its own state budget as much of it was
on the expectations that crude oil would stay north of $80 instead of the
recent range of $45 to $30.
The rest of eastern
europe is gearing up for a chain reaction of Iceland-esk collapses, with
those topping the list in addition to the 3 already mentioned being Bulgaria,
Romania and Hungary in total threatening to default on some $2 trillion of
debt to the European banks.
EU countries hit
hardest by loans to Eastern Europe are Austria, Italy and France as most exposed, for example Austrian banks have loaned as much as 70% of the countries GDP
to Eastern Europe. That liability is OFF its public debt level which stands
at 60% of GDP therefore real liability is somewhere north of 250% of GDP for Austria allowing for all banking sector liabilities.
Western European Iceland's
The most at risk of
government debt default within the European Union are Spain and Greece which
is reflected in the reduced credit ratings of less than triple AAA enroute
towards junk bond status, which further increases's the strains within the
Euro block and means that these countries are in effect being bailed out by
Germany, for if they had been outside of the Euro then their currencies and
economies would resemble the stage at which the eastern european countries
are at i.e. GDP contraction of 10% or more and currencies in freefall.
Britain's Trend Towards
Becoming Iceland
The situation with
regards Austria is dwarfed by Britain's liabilities that already project to
300% of GDP as the below graphs illustrate as per the recent analysis - Gordon
Brown Bankrupting Britain as Tax Payer Liabilities Soar- Update
 
However the above
does not take into account the total nationalisation of the whole UK banking system which would push Britain's liability up towards a currency collapsing 550% of GDP,
as total bank liabilities stand at some 400% of GDP i.e. £5 trillion
against GDP of £1.2 trillion of which so far Britain is officially
exposed to £1.2 trillion.
The consequences
As Novembers article
pointed out ( Bankrupt
Britain Trending Towards Hyper-Inflation?) Britain is already on its
way towards becoming a big version of Iceland as liabilities continue to
soar, the greater the liabilities the greater the probability that the
British economy will collapse into debt default and hyperinflation. Gordon
Brown has already loaded the UK tax payer to the tune of £1.2 trillion
of bankrupt bank liabilities, with the odds strong that this will pass above
£2 trillion by the end of 2009. The amount of liabilities are truly
staggering and really do risk the bankruptcy of the country, for example the
total amount of revenue the government earns from taxation is just £550
billion AND CONTRACTING. Debt EXPLODING, Revenues CONTRACTING = Further sharp
falls in the exchange rate towards parity to the US Dollar.
What Britain Should be doing ?
The government should
protect the country FROM the bankrupt banks which SHOULD be ALLOWED to
go BANKRUPT. AFTER
bankruptcy the government can pick from within the carcasses of the dead
banks the profitable arms that can be restructured into viable retail banking
institutions all at limited cost and liability to the tax payer instead of
the present situation which NATIONALISES the ever multiplying LOSSES whilst
PRIVITISING the REWARDS for bankrupting the banks as we most recently
observed with Fred Goodwin who after destroying RBS banked a £700,000
per year pension at age 50. Whereas if the bank had been allowed to go
bankrupt his pension would be about £21,000 per year.
What to do ?
Britain is sowing the seeds
of future inflation which means higher interest rates and a falling currency
that continues to target parity to the U.S. Dollar, the worlds safe haven
reserve currency. This therefore continues to support the strategy of
accumulating commodities and other inflation sensitive assets as well as
distributing a portion of ones 'cash' into the safe haven currency. Also post
recession, stagflation will ensure that countries such as China will exhibit
greater economic growth and hence capital appreciation than most european countries
including Britain that will continue to attempt to inflate their way out of
the debt mountain.
IT IS FAR BETTER FOR
THE BANKS TO DEFAULT ON THEIR LIABILITIES THAN FOR THE STATE TO BE FORECED TO
DO SO.
Quick review of the
Financial Markets
Gold Quick update ($920)- The trend so far is close to
the forecast for 2009 ( Gold Price Forecast 2009 )as illustrated by the original
graph below that called for a rally to $960 by early March and a decline to
$820 by Mid 2009. Yes gold broke above $960 to above $1000, which on face
value is a sign of relative strength. However time wise gold has turned lower
a little earlier than originally anticipated this therefore is a sign of
weakness, which therefore neutralises the stronger price run and continues to
confirm the trend towards the target of $820. However the rate of decline
suggests an earlier low probably by late April 09. Chris Vermeulen covers gold in greater depth
in his excellent commentary.
Crude Oil Quick
Update ($44)- The crude oil forecast for 2009 as of 8th Dec 08, that concluded with
that crude oil would remain depressed for the whole of 2009 which will seek
to generate an overall saucer shape bottom as illustrated below, however the analysis
had anticipated at least 2 spikes higher that could see crude oil leap
towards $80 before reversing back towards the lows for the year. The
technical picture being painted by crude oil now suggests that crude oil may
be gearing up towards one of these spikes higher.
Stock Markets (6740)- My technical
view for the stocks bear market is that it continues to target a trend
towards 6000 by July 2009 as of 25th Feb, which updated the forecast of 20th Jan. The current phase of the forecast implies that the
DJIA should rally into early April targeting 7800.
Nadeem Walayat
Market Oracle.com.uk
Nadeem Walayat is the editor of
MarketOracle.co.uk.and has over 20 years experience in trading and investing.
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