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before the 1998 crisis, how many here were familiar with the baht? when i read this article it looked like deja vu all over again- with bulgaria [currency unit-the lev] et al playing the role of thailand.
/2007/10/17/bcnlatvia117.xml&vcon=/null/printpage/article&c1=unregistered&c2=unknown|unknown&c3=unknown|unknown&c4=/null/printpage/article/2007/10/17/bcnlatvia117.xml|Eastern+Europe+to+reap+its+own+subprime+crisis&customerid=unknown)
http://www.telegraph.co.uk/money/mai...nlatvia117.xml
| Eastern Europe to reap its own subprime crisis By Ambrose Evans-Pritchard, International Business Editor Last Updated: 6:20pm BST 17/10/2007 Soaring inflation across Central and Eastern Europe has begun to derail the region's booming economy, setting off alarms bells at the IMF and raising the risk of a monetary crunch. Japan and China lead flight from the dollar Hedge funds target currency pegs
Those countries that rely most on foreign debt to fund their housing booms – often financing mortgages in euros, Swiss francs, or even Japanese yen – are already facing a buyers' strike. Money market rates have rocketed and the cost of default insurance has yet to settle back after spiking in August. "This could easily become Europe's subprime crisis," said Lars Christensen, Danske Bank's chief economist for Eastern Europe. advertisement "The macro picture is deteriorating dramatically. On almost all indicators, the extremes are worse than during the East Asia crisis in 1997-1998. We have a story of over-leveraging and asset bubbles with massive excesses that are clearly unsustainable. Look at Latvia, where the current deficit has reached 30pc of GDP, and it is not much better in Bulgaria and Romania," he said. "They could do this when easy money was on tap but that's not available any more after the global credit crunch. The situation is already turning quite serious. The money markets are basically not functioning in the Baltics," he said. The IMF warned in a report last week that capital inflows into the region had reached levels that were "unprecedented for emerging market countries in recent history". The fund said those economies with yawning current account deficits were most at risk. As a whole, the rising economies of Asia, the Middle East, and Latin America have been able to brush off the summer squeeze. Indeed, the MSCI index of emerging market stocks has risen by over 30pc since early August, with help from fevered buying on the Shanghai bourse. But investors have been less kind to countries where banks have funded their booms by drinking deep from the global debt markets – in the manner of Northern Rock. For the EU newcomers in the Baltics and the Balkans, the inflationary villain is the euro, say bankers. The system of euro exchange pegs -– de rigeur for any state preparing to join EMU– has caused their Tiger economies to overheat wildly. They have in effect imported a loose monetary policy geared for the sluggish Old Guard, much as Middle Eastern and Asian tigers are importing America's loose policies through their dollar pegs. Lorenzo Bini-Smaghi, a board member of the European Central Bank, said last week that the euro pegs "might lead to boom and bust cycles, with potentially very severe adjustment costs." His comments sent tremors through Eastern Europe. "This smells like the ERM crisis in 1992," said one banker. Latvia is in the eye of the storm. Riga house prices – now more expensive than Berlin – have begun to slide. According to international estate agent Knight Frank they rose 61pc in the year to March 2007. The Riga group Latio said prices fell 1pc in May, 3.5pc in June, and have almost certainly dived over the summer. But the prime victim so far has been the ex Soviet republic of Kazakhstan, despite holding 3pc of the world's oil reserves and the vast gas fields of the Caspian. After credit growth of 100pc over the last year, its $40bn lending bubble has suddenly popped. House prices in some quarters of Almaty, the country's largest city, have fallen by nearly 20pc in the last three months, while the banks are suddenly finding that the global capital markets are no longer willing to roll over loans. "Kazakhstan has a number of problems in the banking sector. There are no critical, dangerous phenomena," said President Nursultan Nazarbayev yesterday. That is a matter of dispute. Foreign debts are now $92bn, against reserves of $18bn – down $5bn already over the last two months. The share price of the six biggest lenders halved between July and early October. Top lender Kazkommertsbank warned this week that it might have to breach loan covenants if the recent run on local deposits continues. Credit default swaps on Alliance Bank ballooned to almost 1,000 basis points earlier this month. With foreign debts now topping 50pc of GDP, the banks now need $3bn in external funding each quarter to stay afloat. The Kazakh central bank has blamed "speculative attacks" by hedge funds for the turmoil, pledging to take "all necessary measures" to shore up the banking system. However, in doing so it has injected $10.7bn of liquidity, equivalent to 75pc of the monetary base. This has lifted bank shares for now, but inflation is 8.6pc and rising fast. Standard & Poor's has taken fright, downgrading Kazakhstan to BBB-, the lowest investment grade. Fitch has lowered its outlook. Kazakhstan's economy is not big enough to jolt the global financial system, but it lifts the lid on one of the most frothy cauldrons of the emerging market kitchen. Contagion has already spread to those Russian banks that are sagging under the weight of foreign debt – like Northern Rock. "They've stuffed their vaults to the maximum with loans in foreign currencies," said Gennady Melikyan, the deputy governor of Russia's central bank. Together they have borrowed $110bn abroad, in some cases beyond 70pc of their balance sheets. The banks will need to roll over roughly $50bn over the next six months. Russia's central bank has taken a series of emergency steps, injecting almost $11bn of extra liquidity each day in August to stave off a liquidity crisis. This week it cut the interest rate on ruble swap transactions from 10pc to 8pc, lowered the reserve requirement and eased broadened collateral standards. Russia is not going to default, any more than Britain was at risk of defaulting over Northern Rock. Vladimir Putin's empire is flush with oil wealth and holds the world's third biggest stash of foreign reserves ($425bn). "The glory of Russia is that it has a big current account deficit, and it's not susceptible to the carry trade," said Kingsmill Bond, chief strategist at the Russian brokerage Troika. "The real threat is for deficit countries like Turkey that depend on carry trade inflows, which can't last forever," he said. Compared to the $2,000bn market for US subprime and "Alt-A" housing debt, the sums lent to finance East Europe's exuberant embrace of capitalism are in themselves not enough to cause a global financial crisis. But the sums are not small either, and just like the subprime debacle, we don't know who holds the hot potatoes. |
http://www.telegraph.co.uk/money/mai...nlatvia117.xml
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