While the economies of the earth’s most prosperous countries are burning like an out of control California Wildfire, scant attention has been paid to the so called emerging economies like Russia (Down 80% )and India, (Down 70%) and a host of others from south and central America to Asia to the former communist block of Europe. It seems that everyone is getting hammered and the emerging markets are getting hit so bad it’s threatening to set off a bigger crisis than the US Sub Prime disaster and consequent meltdown of Western banking.
Europe has been a big source of funding to the emerging nations, far more than the United States and Japan. As in the case of Iceland’s economic disaster; lots of countries are close to economic destruction who owes Europe huge amounts of money. If these emerging currencies go down the tubes the economies of Europe will follow suit in an explosion that’ll make the recent banking crisis look like a firecracker. It will be several orders of magnitude worse and its epicenter will be the European Union. Consider the following from the London Telegraph:
The financial crisis spreading like wildfire across the former Soviet bloc threatens to set off a second and more dangerous banking crisis in Western Europe, tipping the whole Continent into a fully-fledged economic slump.
Currency pegs are being tested to destruction on the fringes of Europe’s monetary union in a traumatic upheaval that recalls the collapse of the Exchange Rate Mechanism in 1992.
“This is the biggest currency crisis the world has ever seen,” 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 – the country, as it happens, that set off the global banking collapse of May 1931 when Credit-Anstalt went down – and from a string of Club Med countries that rely on foreign funding to cover huge current account deficits.
The latest data from the Bank for International Settlements shows that Western European banks hold almost all the exposure to the emerging market bubble, now busting with spectacular effect.
They account for three-quarters of the total $4.7 trillion £2.96 trillion) in cross-border bank loans to Eastern Europe, Latin America and emerging Asia extended during the global credit boom – a sum that vastly exceeds the scale of both the US sub-prime and Alt-A debacles.
Its entirely possible that a planetary currency catastrophe will ensue, at some point, that will have the basic units of trade and commerce go down the drain, seemingly, overnight. The United States is flooding the market with Dollars and there’s word that Fed Chief Ben Bernanke may cut the interest rate to a fraction above zero as the US continues to “pull out all the stops” to “manage” the crisis.
Meanwhile meeting are going on between Asia and Europe in preparation for the Washington meeting this November in which the world may see its first concerted actions taken toward global banking reform and even a global currency. Fear is the driving force behind all this frantic action. Fear and uncertainty as the world loses faith in key banks, to certain emerging market nations, to losing faith in virtually any world currency. The nations of the earth are rallying in Washington to prevent the final and most destructive progression of such a cycle from inaugurating a global economic depression.
The Failure of banks is bad enough but the prospect of countries like Russia or Pakistan failing is many orders of magnitude more destabilizing to the world economy and possibly to world peace. We’re facing the prospect of trying to answer the question, as a planet, what is money and whats it worth? Who decides what money is worth?
It’s one thing to ask the question of a nation state and another to ask it for the planet earth yet that seems to be the dilemma the nations of the world face today. What is our standard of value? Can we have more than one standard of value? Who regulates the standard of value? Who manages the system and sets the rules? These are very difficult questions because the world seems to have reached a financial unity; or a default interdependence, long before such a world political unity could even be dreamt of.
Last Friday the Planet Earth lost about 5 trillion dollars into thin air as the market carnage around the world rocked the financial globe. Worldwide 5 trillion dollars simply vanished. Gone.
As the US subprime crisis spread and engulfed investment banking to create the credit crisis: the pounding of the emerging markets took was devastating. As the European creditors to the emerging markets face the defaults of emerging countries and their currencies it will in turn wipe out the European markets and perhaps most of their individual currencies. As Europe implodes it will be devastating to the US who will have lost our best trading partners at a time of very steep recession which in turn will become a depression and engulf anyone left standing in Asia.
Its like the China Syndrome: Our economy has melted down, causing others to melt down and when they hit the water table of currency failure it will effectively place the nations of the earth back on economic square one unless a miracle occurs. That’s the point at which we’re the most vulnerable and that’s the point where the world can be taken advantage of by complacency among the principled and avarice among the unprincipled. Here’s a bit more of that article from the London Telegraph that I found on Money Net Daily.
Amazingly, Spanish banks alone have lent $316bn to Latin America, almost twice the lending by all US banks combined ($172bn) to what was once the US backyard. Hence the growing doubts about the health of Spain’s financial system – already under stress from its own property crash – as Argentina spirals towards another default, and Brazil’s currency, bonds and stocks all go into freefall.
Broadly speaking, the US and Japan sat out the emerging market credit boom. The lending spree has been a European play – often using dollar balance sheets, adding another ugly twist as global “deleveraging” causes the dollar to rocket. Nowhere has this been more extreme than in the ex-Soviet bloc.
Russia too is in the eye of the storm, despite its energy wealth – or because of it. The cost of insuring Russian sovereign debt through credit default swaps (CDS) surged to 1,200 basis points last week, higher than Iceland’s debt before Götterdammerung struck Reykjavik.
The markets no longer believe that the spending structure of the Russian state is viable as oil threatens to plunge below $60 a barrel. The foreign debt of the oligarchs ($530bn) has surpassed the country’s foreign reserves. Some $47bn has to be repaid over the next two months.
Traders are paying close attention as contagion moves from the periphery of the eurozone into the core. They are tracking the yield spreads between Italian and German 10-year bonds, the stress barometer of monetary union.
The spreads reached a post-EMU high of 93 last week. Nobody knows where the snapping point is, but anything above 100 would be viewed as a red alarm. The market took careful note on Friday that Portugal’s biggest banks, Millenium, BPI, and Banco Espirito Santo are preparing to take up the state’s emergency credit guarantees.
Hans Redeker, currency chief at BNP Paribas, says there is an imminent danger that East Europe’s currency pegs will be smashed unless the EU authorities wake up to the full gravity of the threat, and that in turn will trigger a dangerous crisis for EMU itself.
“The system is paralysed, and it is starting to look like Black Wednesday in 1992. I’m afraid this is going to have a very deflationary effect on the economy of Western Europe. It is almost guaranteed that euroland money supply is about to implode,” he said.