Tuesday, February 17, 2009

I'm Here To Spread Panic

And why not? Europe is headed for the rocks. And it appears that there is nothing that can save it. The rocks are Eastern European debt.

If mishandled by the world policy establishment, this debacle is big enough to shatter the fragile banking systems of Western Europe and set off round two of our financial Götterdämmerung.

Austria's finance minister Josef Pröll made frantic efforts last week to put together a €150bn rescue for the ex-Soviet bloc. Well he might. His banks have lent €230bn to the region, equal to 70pc of Austria's GDP.

"A failure rate of 10pc would lead to the collapse of the Austrian financial sector," reported Der Standard in Vienna. Unfortunately, that is about to happen.

The European Bank for Reconstruction and Development (EBRD) says bad debts will top 10pc and may reach 20pc. The Vienna press said Bank Austria and its Italian owner Unicredit face a "monetary Stalingrad" in the East.
So let me see are the banks the Russians or the Germans? Would it make a difference?
Stephen Jen, currency chief at Morgan Stanley, said Eastern Europe has borrowed $1.7 trillion abroad, much on short-term maturities. It must repay – or roll over – $400bn this year, equal to a third of the region's GDP. Good luck. The credit window has slammed shut.

Not even Russia can easily cover the $500bn dollar debts of its oligarchs while oil remains near $33 a barrel. The budget is based on Urals crude at $95. Russia has bled 36pc of its foreign reserves since August defending the rouble.

"This is the largest run on a currency in history," said Mr Jen.

In Poland, 60pc of mortgages are in Swiss francs. The zloty has just halved against the franc. Hungary, the Balkans, the Baltics, and Ukraine are all suffering variants of this story. As an act of collective folly – by lenders and borrowers – it matches America's sub-prime debacle. There is a crucial difference, however. European banks are on the hook for both. US banks are not.
And just a while ago the Russians were doing so well. They were making money faster than their elite could steal it. But all the oil producers are in the same fix. Not enough buyers in the market. Too many sellers.

And Europe on the hook for American and Eastern European debt? Priceless.

The real question though is this: why didn't any of the oil producing countries see a threat to their economies when oil went from $100 a bbl to $150 a bbl? And another question. Why is the US Congress restricting drilling in the US which would help stabilize oil markets?
Almost all East bloc debts are owed to West Europe, especially Austrian, Swedish, Greek, Italian, and Belgian banks. En plus, Europeans account for an astonishing 74pc of the entire $4.9 trillion portfolio of loans to emerging markets.

They are five times more exposed to this latest bust than American or Japanese banks, and they are 50pc more leveraged (IMF data).

Spain is up to its neck in Latin America, which has belatedly joined the slump (Mexico's car output fell 51pc in January, and Brazil lost 650,000 jobs in one month). Britain and Switzerland are up to their necks in Asia.

Whether it takes months, or just weeks, the world is going to discover that Europe's financial system is sunk, and that there is no EU Federal Reserve yet ready to act as a lender of last resort or to flood the markets with emergency stimulus.
The Europeans have an excellent system for maintaining the value of their currency. They contract their money supply when their economies turn south (well at least some of them do that). However, that makes them vulnerable to countries that are inflating their money supply (the USA) because they then lose production to the lower cost suppliers. Further weakening their economies.
"There are accidents waiting to happen across the region, but the EU institutions don't have any framework for dealing with this. The day they decide not to save one of these one countries will be the trigger for a massive crisis with contagion spreading into the EU."
It all comes down to this: civilization runs on energy. The higher the cost of energy the less the civilization. So I'm hoping America will do something serious on the energy front. Drill for oil, build more nukes, add more refineries, build a HV DC backbone across the US for electricity, get serious about fusion research. Something.

Because - until we lower the cost of energy we are (at least for a while) going to have to do less with more. Never a cheery prospect.

Why hasn't Polywell Fusion been funded by the Obama administration?
Bussard's IEC Fusion Technology (Polywell Fusion) Explained

H/T Instapundit

Cross Posted at Classical Values


Susan's Husband said...

Your logic seems a bit faulty.

1) Why is no drilling here a problem if petroleum prices are falling without that? Should not the USA save its petroleum wealth for when it is expensive, rather than burning it while it's cheap?

2) You maintain that falling energy prices are destroying Russia, then turn around and write "until we lower the cost of energy we are going to have to do less with more.". Which is it?

M. Simon said...

1) Stability in pricing is a good thing. It makes planning easier. It reduces the likelyhood of severe economic dislocations for both consumers and producers.

2) Economies that depend excessively on extraction industries get severely hurt in down turns. Consumers gain.

When it comes to energy: lower costs advance civilizations.

Susan's Husband said...

I still don't quite see how you can promote price stability and lowering the cost of energy simultaneously. Moreover, since energy prices are currently falling, wouldn't additional drilling further destabilize prices?

M. Simon said...

Price stability vs lower price: gently, gently.

Snake Oil Baron said...

If I may I would like to provide my answers to what might have been rhetorical questions on your part:

"The real question though is this: why didn't any of the oil producing countries see a threat to their economies when oil went from $100 a bbl to $150 a bbl?"

I suppose it can be hard to see clearly with dollar signs of that size in your eyes. Also, if you have the auxiliary goal of destroying the civilization you hate (but are financially dependent on) it can be hard to "feel their pain". These oil producing societies are so consumed with their own ideology (be it South American Marxism, Eastern Stalinism, or Arabian/Libyan/Iranian Islamism) that they can not bother to keep investing in maintaining their oil capacity - I hear that their infrastructure is in a sorry state - so expecting long-term thinking from them may be a bit much to ask.

"And another question. Why is the US Congress restricting drilling in the US which would help stabilize oil markets?"

I suspect it is because Hugo, Putin and the clerical crew are not the only ones who want to see America diminished. It is a cunning plan to create a more fair and equitable, multi-polar world via auto-castration. There are benefits to not having high production now but it will take time to build up capacity when it is needed. It would be smart to build up some capacity and stock supplies while the price is low (and all the energy needed to transport and process it is also low) then put it on the market when the price starts to rise. In effect, the authors of America's energy policy are making a similar mistake to that of the oil producers.