Posted by: tristar3research | February 17, 2009

First Iceland, now Ireland, now Switzerland?

Wow, the sovereign debt news just keeps getting worse. Maybe Obama signing the stimulus plan today will pull the economy out of a tailspin. Of course, the futures point to a 250 point swoon at the open….

Tough Times in Ol Orkney

Tough Times in Ol' Orkney

Ireland’s main stock index dived 4% today, the fifth straight decline, after European media reports over the weekend focused on the possibility of the once-booming Emerald Isle reneging on its debt. “Fears are mounting that Ireland could default on its soaring national debt pile, amid continuing worries about its troubled banking sector,” Britain’s Sunday Times reported. In the credit-default-swap market, the cost to insure $10 million in Irish sovereign debt against default jumped to $377,000 on Friday, up from $262,000 at the end of January and just $24,000 a year ago, reported. The Times noted that pledges made by Ireland to support its crumbled banking sector amount to 220% of the country’s annual economic output. Loans outstanding at Irish banks are more than 11 times the size of the economy. Ireland still has a “Aaa” credit rating from Moody’s Investors Service, but the rating was placed on “negative outlook” last month, meaning it’s at risk of a downgrade.

Now the issue here is whether protectionism will resurface:

Some think the New Deal rescued America from economic crisis in the 1930s. Others argue the opposite. But whatever their ideology, and whatever their credentials, most of the pundits, historians and economists who debate the Great Depression agree about one thing: Whatever may have caused the crisis, protectionism, trade barriers and, yes, the Smoot-Hawley Tariff Act, helped to ensure that it lasted as long as it did. So uncontroversial is this view that it is virtually U.S. government policy. “To this day,” intones a State Department Web site, “the phrase ‘Smoot-Hawley’ remains a watchword for the perils of protectionism.” With equal solemnity, government officials everywhere are echoing that sentiment. Last weekend, the finance ministers of the Group of Seven again swore fealty to the official anti-tariff mantra, announcing that they remain “committed to avoiding protectionist measures, which would only exacerbate the downturn.” The U.S. Treasury secretary, Tim Geithner, agreed: “All countries need to sustain a commitment to open trade and investment policies which are essential to economic growth.” So did his German colleague: “We will have to do everything to ensure history does not repeat itself.”

And now Switzerland?

Switzerland threatened with bankruptcy–  Swiss banks have given billions of credit to eastern europe – now the customers cannot pay back the money. Switzerland is threatened with the fate of Iceland, says economist arthur p. schmidt.  In countries such as Poland, Hungary and Croatia, the Swiss franc has become an important currency. Thousands of households and small firms took out loans in Swiss francs, and not in the national currency zloty, forint, or kuna because of lower interest rates. In Hungary, 31 percent of all loans are in Swiss currency. Amongst household loans, they are almost 60 percent.

And the Eastern European crisis threatens to turn into a real disaster for Continental European lenders– but the Telegraph’s coverage of this is truly unnerving.

Hungary’s forint fell to an all-time low on Monday, and Poland’s zloty slumped to the lowest in five years on plunging industrial output. Half of all loans to the private sector in Poland are in foreign currencies so borrowers face a severe debt shock after the 40pc fall of the zloty against the euro since August. “We’re nearing the level where things could get out of hand,” said Hans Redeker, currency chief strategist at BNP Paribas. The mushrooming crisis has already started to spill over into Germany’s debt markets, lifting credit default swaps on German five-year bonds to a record 70 basis points. The gap between French and German CDS spreads has narrowed abruptly for the first time since the credit crisis began. “Investors are beginning to ask whether Germany is going to have to pay for the rescue of Eastern and Central Europe,” he said.

Ambrose Evans-Pritchard comments: “If mishandled by the world policy establishment, this debacle is big enough to shatter the fragile banking systems of Western Europe and set off round two of our financial Götterdämmerung. Austria’s finance minister Josef Pröll made frantic efforts last week to put together a €150bn rescue for the ex-Soviet bloc. Well he might. His banks have lent €230bn to the region, equal to 70pc of Austria’s GDP.  “A failure rate of 10pc would lead to the collapse of the Austrian financial sector,” reported Der Standard in Vienna. Unfortunately, that is about to happen. The European Bank for Reconstruction and Development (EBRD) says bad debts will top 10pc and may reach 20pc.


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