Foreign Currency Exchange

The Telegraph is reporting "Europe on the brink of currency crisis meltdown."

The latest data from the Bank for International Settlements shows that Western European banks hold almost all the exposure to the emerging
market bubble, now busting with spectacular effect.

They account for three-quarters of the total $4.7 trillion £2.96 trillion) in cross-border bank loans to Eastern Europe, Latin America and emerging Asia extended during the global credit boom – a sum that vastly exceeds the scale of both the US sub-prime and Alt-A debacles.

Europe has already had its first foretaste of what this may mean. Iceland’s demise has left them nursing likely losses of $74bn (£47bn). The Germans have lost $22bn.

Since this is unimaginably worse than I was expecting, I don't know what to do except respond by being extremely bearish. What kind of losses will European banks take on these loans? The best case scenario is that they swap bad debt for US Treasuries at pennies on the dollar.

Austria’s bank exposure to emerging markets is equal to 85pc of GDP
– with a heavy concentration in Hungary, Ukraine, and Serbia – all now queuing up (with Belarus) for rescue packages from the International Monetary Fund.

Exposure is 50pc of GDP for Switzerland, 25pc for Sweden, 24pc for the UK, and 23pc for Spain. The US figure is just 4pc. America is the staid old lady in this drama.

Amazingly, Spanish banks alone have lent $316bn to Latin America, almost twice the lending by all US banks combined ($172bn) to what was once the US backyard. Hence the growing doubts about the health of Spain’s financial system – already under stress from its own property crash – as
Argentina spirals towards another default, and Brazil’s currency, bonds and stocks all go into freefall.

This could bring down the Euro. Germany won't want to pay for this, and if Spain defaults, they will be thrown out. Russia is in trouble too. It seems that Central Bank foreign reserves mask enormous private sector foreign liabilities.

The markets no longer believe that the spending structure of the Russian state is viable as oil threatens to plunge below $60 a barrel. The foreign debt of the oligarchs ($530bn) has surpassed the country’s foreign reserves. Some $47bn has to be repaid over the next two months.

So much for deleveraging.

Hans Redeker, currency chief at BNP Paribas, says there is an imminent danger that East Europe’s currency pegs will be smashed unless the EU
authorities wake up to the full gravity of the threat, and that in turn will
trigger a dangerous crisis for EMU itself.

“The system is paralysed, and it is starting to look like Black Wednesday in 1992. I’m afraid this is going to have a very deflationary effect on the economy of Western Europe. It is almost guaranteed that euroland money
supply is about to implode,” he said.

A grain of comfort for British readers: UK banks have almost no exposure to the ex-Communist bloc, except in Poland – one of the less vulnerable
states.

The threat to Britain lies in emerging Asia, where banks have lent $329bn, almost as much as the Americans and Japanese combined.

It appears to me that a global Depression is inevitable.

Also, central banks around the world are more likely to wage financial warfare against each other. Just look at the anti-US rhetoric coming from China. I lost the link, but a high-ranking Chinese finance official is accusing the US of using the strong dollar to steal the world's wealth. Never mind that dollar strength is only a product of the last few months. Never mind that China is the greatest printer of money that the world has ever seen. At least the stuff we printed comes with interest. Be that as it may, I expect them to throw wrenches in the works whenever possible.