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Where East Meets West

Posted by Larry Doyle on February 18, 2009 6:00 AM |

In the late ’80s, an international banking crisis in Latin America and South America led to massive losses for many money center banks here in the United States. In the late ’90s, the collapse of the Thai bhat and Russian ruble were the precursors to global economic turmoil and significant dislocations in the capital markets.  Fast forward to the current economic turmoil and the bulk of the problems have emanated in the developed markets. From the United States to the U.K. to Japan there are major destructive forces at work. Emerging markets have been following the developed markets with signs of stress present but not overwhelming…..until today.

As if western European banks did not already have enough to worry about, a major factor in Tuesday’s selloff in global equities was the expectation of truly massive unrealized losses due to exposure to the emerging economies of eastern Europe.

With capital flowing into eastern Europe truly drying up (effectively financial protectionism), the pace of delinquencies and defaults on loan payments is expected to skyrocket. European banks are not well positioned to deal with these losses. I would expect this situaiton will lead to the formal nationalization of many European banks. Does that create a wave of nationalization around the globe? At the very least it will put added pressure on the Euro and increase the sovereign credit risk of many European nations.

Banks Reel On Eastern Europe’s Bad News . . . 
The Wall Street Journal; February 18, 2009
By Marc Champion, Joanna Slater and Carrick Mollenkamp

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