The following post is from John Mauldin, who is a Best-Selling author and recognized financial expert. He is also editor of the free Thoughts From the Frontline that goes to over 1 million readers each week. For more information on John or his FREE weekly economic letter go to: http://www.frontlinethoughts.com/learnmore

The Risk in Europe

Share

Here is yet another post from early last year which presages all of the problems we are seeing today. As I have often written, the fake recovery is just an attempt to paper over these problems. It won’t work. Where Ireland, Switzerland, Austria or the Baltics were front and center in February 2009, Greece, Spain and Portugal are now. But don’t think those other problems have gone away. As with Northern Rock, Bear Stearns and Lehman Brothers, contagion spreads to the weakest link – which either passes the test (usually with external aid) or collapses. And then it’s on to the next weakest link. That’s how crises work. This one is no different.

Share
FT Alphaville has a post up indicating that the UBS EMEA economics team is much more sanguine about prospects in Eastern Europe than many market participants. The most important part of the UBS contents reads as follows:
We don’t normally respond directly to articles in the financial press, but quite a number of clients [...]

In an interview with Swiss daily Tagesanzeiger, a well-known economist has warned that Switzerland risks bankruptcy, if the recent market turmoil centering on Eastern Europe is not contained quickly. At issue are loans made in Swiss Francs to Eastern European debtors. With many countries in the region falling into depression, currencies and asset prices are plunging. Therefore, debtors domiciled in Eastern Europe are increasingly expected to have difficulty with mounting foreign debt loads — and that spells trouble for Switzerland.

Danielle, a European reader, recently asked what is going on in the European Union regarding mark-to-market. Basically, the EU has already relaxed mark-to-market requirements as an outgrowth of the market turbulence surrounding Lehman Brother’s bankruptcy. Below is an October article from Business Week highlighting the key issues.

After Iceland collapsed and went into Depression, there were a number of reports in the press regarding countries with outsized financial sectors. The worry was that the collapse of Iceland was not an isolated incident, but rather a harbinger of things to come for smaller countries with large financial sectors. I wrote a post in November called “Iceland: a cautionary tale for small nations” which pointed to a number of countries that I considered vulnerable including Austria, Denmark, Ireland, Sweden and Switzerland. Even the United Kingdom has been a concern.

Just a few hours ago, I posted an article about European toxic asset exposure based on a Telegraph article. The crux of the Telegraph piece was that European banks have a shed load of bad debt on their books. A secret European Commission document allegedly put the exposure of the European banks to ‘toxic’ assets at £16.3 trillion, which is reported t represent 44% of total European bank assets (assuming an exchange rate of 1.4355 for GDP/USD this equates to a total asset base of $53 trillion). Leaving aside the question of just what qualifies as a dodgy or toxic credit, it bears understanding just how large (and leveraged) European banks are.

Below is a list of the largest European banks by assets at the end of 2007. You should notice RBS is so large in relation to the UK economy that one wonders how the mergers which formed e enterprise were allowed to take place (Wikipedia puts British GDP at $2.78 trillion versus the $3.8 trillion in assets at RBS). I use RBS as an example of the egregious nature of asset growth at European banks, but they are merely the largest of many such behemoths. The aggregate total assets of the 23 banks on this list is $33 trillion.

If you had read the Telegraph on February 12, you would be inclined to believe there might be even more toxic assets on European bank balance sheets than on American bank balance sheets. However, anyone who read the Telegraph later would have seen the £16.3 trillion figure magically disappear.

Niels Jensen from Absolute Return Partners based in London sent me the following insightful analysis regarding the Euro, the possibility of Eurozone default, the possibility of a Eurozone bust-up and all things European. As Niels is snowed in under 8 inches of snow in wintery London, he obviously has had the opportunity to craft a piece of brilliance.