While Rome Burns...

In this article, John Maudlin looks at European banking and the serious risk of their problems sparking a global financial crisis. Not only are EU banks exposed to US problems, but they have bigger problems of their own with $1700Billion loans to eastern Europe, which is now in a deep recession bordering on depression. Worse, the fractured nature of the European Union means they don't have cohesiveness to deal with problems like the US can. Some of the teetering banks are bigger than the countries they are domiciled in, and the strongest countries have their own serious problems with spiking unemployment and 10% GDP constrictions. Will they rescue Portugal, Spain, Italy, Greece, Ireland, Austria, and a bunch of smaller guys? Seems unlikely, but the domino effect of a big bank failure there would resound around the world within days.

In Poland for example, 60% of mortgages are in Swiss Francs, because home owners could borrow at a fraction of the domestic interest rate for many years. Now however, the Polish currency has fallen by half, so mortgage payments have doubled just as the economy tanks. A lot of mortgages will default.

Austrian banks alone have lent almost $300 Billion to eastern europe, 70% of its GDP, much of it borrowed from Swiss banks, and even a 10% loan loss would bankrupt the Austrian financial system according to the Austrian finance minister. Spain has similar problems. Ireland is ready to fall over. Portugal, Greece, Italy, all in serious trouble.

In the US they talk of banks too big to fail, but the US could nationalize them if they needed to. In Europe there are banks to big to save, compared to the GDP of the home country. Large banks that have lent out too much money at much higher leverage ratios than the most leveraged US banks.

Meanwhile it's really tough times for all the EU countries, and even the strongest are suffering. Germany contracted at an annual rate of 8.4% in the fourth quarter, and Deutsche Bank expects 9% contraction by the end of 2009, the sort of level that sparks popular revolt. How can German politicians support the smaller EU countries with problems of their own like that at home?

Maudlin shows the following chart to show how widespread the risk is, and says this has the potential to be much worse than the US crisis: