Bloomberg are reporting (via Der Standard) that Austrian banks have the biggest exposure to Forex lending in Eastern Europe. This is hardly breaking news, and I have had working notes for a post on this lying around for months (here, please excuse the mess, I will append some of this to this post if time permits at the weekend). The issue is simply finding the time to do everything. Basically I would say that all this business about not devaluing currencies (and hence imposing wage cuts) in Eastern Europe is to do with this issue (also highly exposed are the Swedish banks, and Italy’s Unicredit). Der Standard cite an as yet unpublished International Monetary Fund report to the effect that Austrian banks have loans outstanding in Eastern Europe equal to about 70 percent of the countryâ€™s gross domestic product, a higher percentage exposure than any other country.
If you are in the business of liking scary quotes, you could try this one (which comes from the king of scary quotes and dreaded anthropologist’s grandson – Ambrose Evans Pritchard – but that doesn’t make it any less scary:
â€œThis is the biggest currency crisis the world has ever seen,â€ said Neil Mellor, a strategist at Bank of New York Mellon. Experts fear the mayhem may soon trigger a chain reaction within the eurozone itself. The risk is a surge in capital flight from Austria â€“ the country, as it happens, that set off the global banking collapse of May 1931 when Credit-Anstalt went down â€“ and from a string of Club Med countries that rely on foreign funding to cover huge current account deficits.
The more sobre version would be this one from Paul Krugman that I keep using:
â€œThere is a burgeoning economic crisis in the European periphery,â€ Krugman said on the ABC network Dec. 14. â€œThe money has dried up. Thatâ€™s the new center, the center of this crisis has moved from the U.S. housing market to the European periphery.â€
Either way, the economic meltdown in parts of Europe’s Eastern and Southern periphery is now in the process of working its way back up the pipes and to the core, to Germany in terms of the collapse in GDP growth and exports, and to Austria in terms of stress on the banking system.
Germanyâ€™s economy may have contracted the most in more than two decades in the final quarter of 2008 as the global financial crisis hurt exports and damped spending, the Federal Statistics Office said. The economy probably shrank between 1.5 percent and 2 percent in the fourth quarter from the third, Norbert Raeth, an economist at the statistics office, said at a press conference in Frankfurt today. A 2 percent drop would be the worst quarterly contraction since German reunification in 1990 and the most for West Germany since the first quarter of 1987.
And while I am here, Izabella Kaminska has a timely piece on forex lending exposure in Poland over FT Alphaville. The situation in Poland is important, since the country is widely regarded as the strongest and least vulnerable of the EU10 economies (see Christoph Rosenberg, for example). So basically, I would say that rather than being just one more “meltdown” in Eastern Europe, if Poland crumbles this will be the last domino to fall, bringing all the rest down in its train – craaaash (I wrote a longish piece on Poland back in October, here). The Leu and the Forint will need to correct to levels which bring back export competitiveness, and behind them will come the pegs in the Baltics and Bulgaria, bring with them all the west european banks who funded the lending.