Comments on: Roubini’s RGE Monitor: Threat of ‘Asia-Style Crisis’ in Eastern Europe http://www.creditwritedowns.com/2009/06/roubinis-rge-monitor-threat-of-asia-style-crisis-in-eastern-europe.html Finance, Economics and Markets Fri, 10 Feb 2012 00:37:00 +0000 hourly 1 By: aitrader http://www.creditwritedowns.com/2009/06/roubinis-rge-monitor-threat-of-asia-style-crisis-in-eastern-europe.html#comment-56556 aitrader Thu, 11 Jun 2009 08:15:00 +0000 http://www.creditwritedowns.com/2009/06/roubinis-rge-monitor-threat-of-asia-style-crisis-in-eastern-europe.html#comment-56556 So no more green shoots, eh? Here's my older comment on the current sitch back when you were writing about the "recovery" - http://www.creditwritedowns.com/2009/05/both-initial-claims-and-continuing-claims-now-pointing-to-recovery.html#comment-9785452 . Roubini has got it right but he is a bit optimistic. If the Baltics go the way of Argentina and default on their debt it will ignite a chain reaction through several other teetering Eastern Europe economies. The firestorm will hit the IMF and Western Europe with a tidal wave of insolvencies that even the IMF's special drawing rights money-printing machine cannot fix. So the IMF is well aware that they cannot let this happen. What I believe they will do instead - since there really is no other option - is to force Lithuania, Latvia, and Estonia to begin ratcheting down their peg to the Euro so they can pay their respective national debts more cheaply. This will keep the states' coffers semi-solvent, albeit with a lot of IMF loans to do so. The bag-holders, and losers, in this game are the Western European banks that wrote mortgages, both commercial and residential, to Baltic citizens denominated in Euros, Swiss Francs, and Swedish Krona. Sweden has just asked for a 100b SEK guarantee from the IMF and is doing what it can to shore up its banks in advance of a foreseen wave of bad loans. I believe this amount would only help if the Baltics <i>do not</i> devalue their currencies. If they devalue, and I see no other option really, the amount defaulted to Western European banks will at least double. So good for the Baltic sovereign states but very bad for some of the over-extended smaller states of Western Europe. The IMF in all of its "wisdom" will probably try to stair-step the devaluation to lessen the blow. This is like breaking someone's arm in steps rather than just one blow. In other words the damage will probably be greater with a ratcheted devaluation rather than a single go. And let's not forget big-brother Russia waiting in the wings. Putin and company have not forgotten nor forgiven the Baltics for their swing to the West. I see the bear stepping in and strong-arming the Baltics, and their creditors, with loans ala their move in Iceland. Along with the "help" will come a list of concessions such as no more NATO involvement and a swing back to the folds of their economically expansionist Eastern neighbor. So no more green shoots, eh? Here’s my older comment on the current sitch back when you were writing about the “recovery” – http://www.creditwritedowns.com/2009/05/both-initial-claims-and-continuing-claims-now-pointing-to-recovery.html#comment-9785452 .

Roubini has got it right but he is a bit optimistic. If the Baltics go the way of Argentina and default on their debt it will ignite a chain reaction through several other teetering Eastern Europe economies. The firestorm will hit the IMF and Western Europe with a tidal wave of insolvencies that even the IMF’s special drawing rights money-printing machine cannot fix. So the IMF is well aware that they cannot let this happen.

What I believe they will do instead – since there really is no other option – is to force Lithuania, Latvia, and Estonia to begin ratcheting down their peg to the Euro so they can pay their respective national debts more cheaply. This will keep the states’ coffers semi-solvent, albeit with a lot of IMF loans to do so. The bag-holders, and losers, in this game are the Western European banks that wrote mortgages, both commercial and residential, to Baltic citizens denominated in Euros, Swiss Francs, and Swedish Krona.

Sweden has just asked for a 100b SEK guarantee from the IMF and is doing what it can to shore up its banks in advance of a foreseen wave of bad loans. I believe this amount would only help if the Baltics do not devalue their currencies. If they devalue, and I see no other option really, the amount defaulted to Western European banks will at least double. So good for the Baltic sovereign states but very bad for some of the over-extended smaller states of Western Europe.

The IMF in all of its “wisdom” will probably try to stair-step the devaluation to lessen the blow. This is like breaking someone’s arm in steps rather than just one blow. In other words the damage will probably be greater with a ratcheted devaluation rather than a single go.

And let’s not forget big-brother Russia waiting in the wings. Putin and company have not forgotten nor forgiven the Baltics for their swing to the West. I see the bear stepping in and strong-arming the Baltics, and their creditors, with loans ala their move in Iceland. Along with the “help” will come a list of concessions such as no more NATO involvement and a swing back to the folds of their economically expansionist Eastern neighbor.

]]>