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.

Politicians in Washington D.c. have cooked up a nice way to re-create the mistakes of the Great Depression by attaching a ‘Buy American’ provision onto the stimulus bill making its way through Congress. Apparently the Canadians and Europeans have already voiced their concerns, with the Europeans threatening to retaliate.

Danish Prime Minister Fogh Rasmussen is preparing Denmark for admission to the Eurozone. Despite my skepticism about the Euro as a currency, I would say that Denmark is a perfect candidate for entry. The Danish economy is already very well harmonized with “core” Europe of France and Germany. Their business cycle, monetary policy, political economy, and per capita GDP are all similar to France and Germany.

Below is my translation of part of a German-language article from Financial Times Deutschland which discusses the upcoming referendum in Denmark for joining the Euro in which Fogh Rasmussen makes some interesting contrasts between Denmark and the UK.

The need to bailout banks for their aggressive lending in central and eastern Europe is becoming ever more apparent. An Austrian bank has taken the lead in getting a consortium of banks together to lobby the European Union for bailout funds.

This should be seen for an undeserved handout for individual banks. I like the argument used to support this request (bolded in the snippet below) — it is self servingly cynical, but could be effective. However, it remains to be seen whether entire banking systems or individual banks will be successful in getting any funds outside of those provided by their national governments.

Stay tuned.