Eastern Europe in the gun

The news flow out of Europe is vast and fast at present. It is difficult to cover every story in my morning pieces so I am putting together a supplemental post later in the day if the news flow requires it on any particular day. Today is one of those days.

For those who follow my daily posts you may remember last Monday I spoke about  the ways in which European banks are attempting to avoid government control while re-capitalising themselves and how this would have a detrimental effect on Eastern Europe. I note today that the Austrian government  has been given explicit instructions to the country’s banks to limit the amount of credit available to those nations to protect its own ratings:

Austrian banks will have to curb new loans in central and eastern Europe, where they are among the biggest lenders, under rules imposed by Austrian authorities seeking to protect the country’s AAA credit rating.

Erste Group Bank AG (EBS), Raiffeisen Bank International AG (RBI)and UniCredit SpA (UCG)’s Bank Austria AG will be prevented from loaning significantly more than they raise in local deposits in countries such as Hungary, Romania and Ukraine starting next year, the Austrian central bank said in a statement today. That would limit their ability to fund credit growth with loans from the parent company.

“This is certainly going to affect the availability of credit,” said Christian Keller, head of emerging EMEA research at Barclays Capital in London. “There’s also going to be more differentiation, which will put pressure on countries like Hungary, Romania, Ukraine or Bulgaria.”

This is obviously going to cause further issues for Europe as slowing credit brings on deflation across the Eastern block which will then feedback into Western Europe as trade falls and bad debts. Hungary is one of the countries mentioned in that article, and they are already in trouble, but for slightly different reasons:

Hungary has asked the International Monetary Fund (IMF) and the European Union (EU) for financial assistance. As the eurozone debt crisis has unfolded, official figures showed that the Hungarian governmment’s total debt had risen to 82% of its output, as its currency, the forint, has weakened.

Hungary has said it wants “a new type of co-operation” with the IMF.

The IMF team in Budapest will now return to Washington to discuss the request.

The IMF confirmed that it and the European Commission had received a request for assistance.

“The authorities… indicated that they plan to treat as precautionary any IMF and EC support that could be made available,” the IMF added.

Last week, Hungary’s economy ministry said in a statement: “The government has started talks with the IMF and the EU about a new agreement that, instead of austerity measures, will aid Hungary’s economic growth.”

The forint fell to a record low against the euro last week and government bond yields have soared. Most mortgages in Hungary are denominated in a foreign currency, in particular the Swiss franc.

You should never borrow money in a foreign currency unless you are hedged, which the citizens of Hungary are obviously not. The fact that the Hungarian government even allowed this to happen is economic madness in itself, but their solution may end up destroying the economy:

Two-thirds of Hungarian mortgages are denominated in Swiss francs and there’s been a lot of chatter about officials coming to the rescue of borrowers. The latest move has taken markets by surprise.

The government is letting borrowers who make payments on time, the opportunity to pay a fixed rate of 180 Hungarian forint to a Swiss Franc and 250 forint to a Euro, with banks taking a massive blow. Officials also have a temporary break on evictions, and have introduced early repayment options.

Societe Generale analyst Guillaume Salomon says Swiss franc mortgages are estimated to total 5.5 trillion forint.  The government expects 10% of mortgages to be re-financed, while most expect that figure to be closer to 20% – 30%. Salomon thinks the impact on banks would be massive. :

“The losses for the banking sector roughly equates to about EUR600mn for every 10% take- up, or potentially a total just under EUR2bn, were the high end of expectations to be met.”

€2 billion in losses would be a huge blow at a time when the global economy is slowing. Critics have argued that this plan isn’t well thought out and could prompt banks to shut down operations in Hungary, dissuade investors and prompt a downgrade of the country’s credit rating. It could also hurt Hungary’s growth which would be devastating to the country’s already pallid economy.

Its seems fairly clear that banks were already going to significantly lower their exposure across Eastern Europe due to the new 9% capitalisation requirements, this will simply speed up these processes in Hungary.

Finally the other developing story is that yet another European political edifice has fallen over under the pressure of the financial crisis.

The man tasked with ending Belgium’s record political crisis, by finally putting a government together, threw in the towel Monday after talks collapsed over budget cuts to counter the eurozone debt crisis.

As Belgium hit 526 days without a government, Socialist leader Elio Di Rupo offered his resignation to King Albert II, who delayed any decision and exhorted politicians to find a rapid solution for the sake of the kingdom.

The king “recalls the gravity of the current situation and underlines that the defence of the general interest of all Belgians and European deadlines require a very quick resolution to the political crisis,” the palace said.

“The king asks each negotiator to use the next hours to reflect and measure the consequences of a failure, and actively find a solution.”

The latest marathon talks collapsed at 2:00 am on Monday after Flemish and French-speaking centre-right parties rejected Di Rupo’s plan to curb the public deficit, saying it relied too much on tax hikes and not enough on cuts.

Earlier this month EU economic affairs commissioner Olli Rehn warned Belgium, amongst a group of other nations, that it could face fines if it failed to get its government debt under control. It would appear that isn’t going to be happening in a hurry.

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  1. I dont understand how the Euro can remain so strong given the amount of countries in trouble and the news going from bad to worse on what seems like a daily basis now.

    • My guess is its seen as a relative safe haven. Similar to how the USD rallies when US govt debt makes bad headlines.

      Weird I agree.

    • I think it is also related to repatriation of funds. Perhaps banks selling assets foreign assets to recapitalize.

      You might want to ask yourself the same question about the AUD. House prices and employment aren’t going anywhere but down, especially when adjusted for inflation/population growth. China is slowing too.

      But don’t worry, this is a saga, not a short-film. It’ll end eventually.

    • Remember the scene from the movie “Titanic”, where everyone was scrambling to get to the stern, even as it was sinking? That’s the Euro/USD.

  2. Surely there’s a trigger for going back to elections that occurs some time prior to 526 days without a formal government? And I thought US/Australian politics was dysfunctional!

  3. The BurbWatcherMEMBER

    It’s funny, but I still have a hunch that the egg to crack it all will be Japan…

    Dunno why….just think it will….currency crisis, i think….


    • … watched Kyle Bass selling his short-Japanese-government-bonds story? I’ve seen this Japan scare story in various places now, and sure enough, I’ve been informed that he ran his mouth on BBC yet again.

      My hunch is that he has been losing money like a sprinkler all these months, and will continue to get burnt for the foreseeable future.

    • You have to ask yourself how the hell a country with its own currency not pegged to any other one can have a “currency crisis.”

      The only semi-“currency crisis” scenario is the one of hyperinflation. And Japan has been in deflation as we speak, with a grossly overvalued currency to boot.

      Your “hunch” doesn’t make any sense.