Nations near bankruptcy, but IMF too poor to help

Andrew64

I think we need to keep an eye on what's brewing up in eastern Europe. This could impact on us.

http://www.theglobeandmail.com/servlet/story/RTGAM.20090226.wIMFreport0226/BNStory/Business

"The global recession could bankrupt as many as 16 countries, and the world's lender of last resort says it doesn't have anywhere near enough money to bail them all out. That's the hard message contained in a report released yesterday by the International Monetary Fund, as Latvia's Prime Minister-designate warned that the government is on the edge of financial collapse, Romania's central bank chief said the country may need IMF aid to stabilize its deteriorating finances and several other countries showed widening cracks stemming from the rising tide of financial and economic woes swamping the globe."

"The credit ratings of both Latvia and Ukraine were slashed yesterday to low junk status by Standard & Poor's, effectively cutting them off from the capital markets."

mardatha

Can somebody who knows about this stuff tell me why and how this might affect us ? I'm sure it wil in some way but I don't know enough of how these things work.

Reaper

To be honest it's too big an issue for me to know the answer. For the population of the countries involved it will be bad news of course. Also it will add to the woes of any country that has lent them money if they aren't going to get it back, and the same goes for companies that invested over there. In both cases there is a danger that the impact on already weak economies/companies will be to push them over the edge too if they don't get paid.

However much more significant than Latvia and Ukraine is what happens if a country that has adopted the Euro goes under. I saw an interview with the ex-head of the German Bundersbank and he said it was a distinct possibility. When asked what effect that would have on the other countries in the Euro he said, several times, he had "no idea". If he doesn't then I'm certainly not qualified to answer.

My impression is that continental Europe will be most affected by defaults as they have a lot of money invested over there.

Almost all East bloc debts are owed to West Europe, especially Austrian, Swedish, Greek, Italian, and Belgian banks.

And in particular Austrian banks:

banks have lent €230bn to the region, equal to 70pc of Austria's GDP

There is an outside possibility of it causing a global meltdown but in practice I think debt restructuring and bailouts more likely.

piggeh

I guess these countries will not be able to bail out any domestic industries though, like ourselves, as they cannot borrow money from the International Capital markets. So if industry is struggling it will have to go under, they cannot run public spending at a deficit as they cant borrow any more etc.

Still, at least future generations will not have a monumental tax bill to pay for the next 80 years and they wont have to worry about the new credit bubble bursting in the future (or rather tha same one that they're still trying to inflate again).

baileysbattlebus

I'm not sure it will effect here greatly - I think we have more exposure in the Far East and Asia than in Eastern Europe. What is happening in Eastern Europe could be a catastrophe though.

Western banks have lent $1.74 trillion (£1.22 trillion) to the former Soviet bloc, including $1 trillion of foreign loans and $700bn in home currency debt through local banking subsidiaries - most Eastern European currencies have collapsed against the Euro and Swiss Franc.. For instance Poland & Hungary have seen their currencies drop 30% against the Euro and Swiss franc. $400bn of debt is due to be rolled over in the next year- with no credit - it could be interesting. The IMF reserves are about $200bn.

A lot of mortgages and loans are in Euros and Swiss Francs because the interest rates were lower than their home currencies -60% of mortgages in Poland are in Swiss Francs (though not necessarily from Switzerland, Austria made a lot of loans in Swiss Francs too)- as their currencies have fallen their debt has grown correspondingly. Ouch!

Austria's lending to Eastern Europe is about 70% of GDP,

Austria’s finance minister, Josef Proell, fears that Eastern European default rates above 10% will be sufficient to destroy his nation’s banking industry

.

When the price of oil was going up, a lot of exporters invested in western European banks, who used their increased deposits as a basis to extend credit to eastern European subsidiaries.

'Now they might well be looking to get their deposits back. If they do, the impact will be significant. Unless the EU provides some kind of support, the effects could be worse than Asia.' Asia is a frequent point of comparison. Lars Christensen, the analyst at Denmark's Danske Bank Group who predicted Iceland's collapse two years beforehand, said: 'This looks like a market meltdown on the same scale. The markets have decided the region is the subprime area of Europe and everyone is running for the door.'

looking at the table it looks as if we will get off very lightly compared to a lot of other countries.

Mary_Hartnell

A lot of these mortgages were taken out in the "sure" knowledge that the country would be in the Euro within 5 - 10 years.
How is the Slovak currency getting on?

baileysbattlebus

Mary_Hartnell wrote: »

A lot of these mortgages were taken out in the "sure" knowledge that the country would be in the Euro within 5 - 10 years.
How is the Slovak currency getting on?

Slovakia is in the Euro as of beginning of January this year - I think - so they will come under the Euro umbrella and in theory should be better placed than a lot of other Eastern European countries.

Arcaine

Eastern Europe is a mess, some figures I saw the other day.

This is taken from

http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/4623525/Failure-to-save-East-Europe-will-lead-to-worldwide-meltdown.html

Eastern Europe owes $1.7 Trillion to overseas banks on short term securities. $400 Billion due for repayment or refinancing this year alone, equivilent of a thrid of the regions GDP. Russia has burnt through 36% of its foriegn currency reserves trying to prop up the Rouble, and yes Western Eurpean banks are about to take a further hammering.

The IMF does have the power to issue bonds to raise money, but who would put up the cash to buy them.

PolishBigSpender

Just a view from Poland.

Things aren't too bad here. The weak Zloty is bad news for us going abroad, but we haven't hit the psychological 5zl/Euro mark where Tusk has said that he would intervene. We've got foreign currency reserves, and have recently done some sort of strange deal involving selling EU funds - either way, things aren't desperately bad.

The CHF/EUR mortgage situation is the big one, though. People are definitely hurting here because of the rise in mortgage costs, but it's not quite at the point where mass defaults on the scale of the US will be seen. However, if the Zloty keeps being attacked and falls below 5zl/EUR - then trouble will start.

Ironically, one of the big problems in Poland concerns overseas investors who cannot afford to service their CHF/EUR mortgage. Brits are especially guilty of this, particularly as many of them bought at a ridiculously inflated price to begin with.

matbe

baileysbattlebus wrote: »

I'm not sure it will effect here greatly - I think we have more exposure in the Far East and Asia than in Eastern Europe. What is happening in Eastern Europe could be a catastrophe though.

Western banks have lent $1.74 trillion (£1.22 trillion) to the former Soviet bloc, including $1 trillion of foreign loans and $700bn in home currency debt through local banking subsidiaries - most Eastern European currencies have collapsed against the Euro and Swiss Franc.. For instance Poland & Hungary have seen their currencies drop 30% against the Euro and Swiss franc. $400bn of debt is due to be rolled over in the next year- with no credit - it could be interesting. The IMF reserves are about $200bn.

A lot of mortgages and loans are in Euros and Swiss Francs because the interest rates were lower than their home currencies -60% of mortgages in Poland are in Swiss Francs (though not necessarily from Switzerland, Austria made a lot of loans in Swiss Francs too)- as their currencies have fallen their debt has grown correspondingly. Ouch!

Austria's lending to Eastern Europe is about 70% of GDP,

.






looking at the table it looks as if we will get off very lightly compared to a lot of other countries.

How can Italy have lent 152 billion They haven't a pot to p!ss in let alone a window to throw it out of.

No wonder the worlds gone to hell??????

Mary_Hartnell

These will be commercial loans via normal banks.

I see Hungary has gone and done an Oliver Twist, on behalf of the new members at an emergency meeting of the EU "can we have some more?"

The Germans have said No!

http://www.timesonline.co.uk/tol/news/world/europe/article5828323.ece