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Telegraph: Europe on the brink of currency crisis meltdown


The financial crisis spreading like wildfire across the former Soviet bloc threatens to set off a second and more dangerous banking crisis in Western Europe, tipping the whole Continent into a fully-fledged economic slump.

"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.

by blackhawk on Sun Oct 26th, 2008 at 07:00:04 PM EST
[ Parent ]
CNBS/Squawkbox I can expect ... what?  More wide-eyed craziness?  When do we see people jumping out of windows?  I'm getting bored!  How about old retired people jumping out of Nursing Homes?  I'll settle for that.

The good news ... it's only a life sentence. You eventually leave this planet of idiots.
by THE Twank (yatta blah blah @ blah.com) on Sun Oct 26th, 2008 at 07:14:35 PM EST
[ Parent ]
give me a 2 rating?  I didn't use one curse word.  No pleasing some folks.

The good news ... it's only a life sentence. You eventually leave this planet of idiots.
by THE Twank (yatta blah blah @ blah.com) on Mon Oct 27th, 2008 at 08:15:06 AM EST
[ Parent ]
It appears what I wrote a week ago
What you have here, essentially, is the conditions for an Asian Crisis situation: EU free movement of capital while Hungary stays outside the € makes it possible for Hungary to take on massive amounts of €-denominated debt and it is unclear that EU rules would allow the Hungarian government to put a cap on the amount of €-denominated debt. The Forint is in the European exchange mechanism which creates the conditions for a Soros-attack-on-the-pound situation.
more or less agrees with Ambrose Evans-Pritchard.
Currency pegs are being tested to destruction on the fringes of Europe's monetary union in a traumatic upheaval that recalls the collapse of the Exchange Rate Mechanism in 1992.

...

The IMF's experts drafted a report two years ago - Asia 1996 and Eastern Europe 2006 - Déjà vu all over again? - warning that the region exhibited the most dangerous excesses in the world.

Inexplicably, the text was never published, though underground copies circulated. Little was done to cool credit growth, or to halt the fatal reliance on foreign capital. Last week, the silent authors had their moment of vindication as Eastern Europe went haywire.

Should I worry?

A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith
by Migeru (migeru at eurotrib dot com) on Sun Oct 26th, 2008 at 07:32:36 PM EST
[ Parent ]
Who knows. For the time being, the Forint is strengthening: after reaching up to 285 an Euro and ending at 275 last week, today it improved to near 270 (271.85 right now). Effect of the news of the damn IMF deal, an intervention?

*Lunatic*, n.
One whose delusions are out of fashion.
by DoDo on Mon Oct 27th, 2008 at 06:47:54 AM EST
[ Parent ]
I note some economists and CEOs are arguing for a fast-track joining of the Eurozone, whatever it takes. (I have grave suspicions as to what it would take.)

*Lunatic*, n.
One whose delusions are out of fashion.
by DoDo on Mon Oct 27th, 2008 at 06:49:18 AM EST
[ Parent ]
I think fast-track to the Eurozone would look like IMF-squared. A horrific welter of reform imposed on a terribly short timescale.
by Metatone (metatone [a|t] gmail (dot) com) on Mon Oct 27th, 2008 at 07:22:22 AM EST
[ Parent ]
Disaster Capitalism.

*Lunatic*, n.
One whose delusions are out of fashion.
by DoDo on Mon Oct 27th, 2008 at 07:40:19 AM EST
[ Parent ]
Joining the Eurozone with the present restrictions on National Budget deficit is a recipe for economic suicide.  

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre
by ATinNM on Mon Oct 27th, 2008 at 10:43:38 AM EST
[ Parent ]
If you're trying to deal with a currency crisis, definitely yes. But if you're a creditor or a wealthy person who would hope to be able to get our money out at a favourable exchange rate, who cares whethe rthe economy dies in the process?

A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith
by Migeru (migeru at eurotrib dot com) on Mon Oct 27th, 2008 at 12:08:16 PM EST
[ Parent ]
These people aren't wealthy.  They just own a bunch of 'Claims' measured in 'Money' that if they are fortunate will be redeemed in 'Cash' so they can buy things and pay bills.

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre
by ATinNM on Mon Oct 27th, 2008 at 12:54:09 PM EST
[ Parent ]
...meanwhile, the Budapest stock market's BUX index fell more than 10% upon opening.

Also: yet again, discount treasuries found no buyers.

*Lunatic*, n.
One whose delusions are out of fashion.

by DoDo on Mon Oct 27th, 2008 at 06:52:05 AM EST
[ Parent ]
I wouldn't take much stock in short-term movements. Look at the year-to-date exchange rates:



A funny thing happened in July - I didn't include Slovakia as they'll be joining the Euro in January and their currency is pegged.

A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith
by Migeru (migeru at eurotrib dot com) on Mon Oct 27th, 2008 at 08:03:10 AM EST
[ Parent ]
Also note (looking at the faint part of the long series at the bottom) that the Crown and the Zloty have seen a secular increase in value from 2004 to this year, whereas the Forint has had wider fluctuations and no long-term trend.

A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith
by Migeru (migeru at eurotrib dot com) on Mon Oct 27th, 2008 at 08:06:55 AM EST
[ Parent ]
The "wider fluctuation" in the HUF exchange rate seems to be the latest scare in 2006:

What is remarkable is that the same causes of the currency fluctuations were quoted back then (large amounts of loans in foreign currencies) and nobody has done anything about it. Our friend Ambrose again (he seems to be the only one to have talked about that mythical unpublished report "deja vu all over again" from the IMF).
Borrowers have rushed to take out loans in francs and other currencies, but murmurs over the exchange risks are growing, reports Ambrose Evans-Pritchard in Budapest (21 Sep 2006)

...

Over 60pc of total loans to businesses and households are now in foreign currencies, and damn the exchange risk. Though Hungary is the region's pioneer with some $2bn a year in Swiss franc loans, Poland, Croatia, Romania, and lately Turkey are catching up fast. This is Europe's "carry trade", every bit as creative as the better-known yen trade that has juiced the world's asset markets with liquidity at near zero interest rates from the Bank of Japan.

...

"There is nothing we can do to stop foreign exchange borrowing, and we don't even try. As members of the European Union, we have to respect the free flow of capital," he [Hamezc Istvan, director of Hungary's Central Bank] said.

The Central Banker blames the government '4 years ago' (that would be 2002) for making a mess of the economy. Who was in power in 2002? A fistful of Euros also carried the story.

A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith
by Migeru (migeru at eurotrib dot com) on Mon Oct 27th, 2008 at 08:24:40 AM EST
[ Parent ]
Your quote doesn't support your point. Ambrose is noticing a then new trend at the time the Forint came back from the brink, not the cause of the 2006 movements. The Central Banker is closer to the truth. It has to do with runaway deficits, elections and repercussions, as per my previous comment.

In 2002, the incumbent Fidesz government and the Socialist-liberal opposition ran a heated campaign with outlandish promises. When the opposition won narrowly, the then PM felt they must deliver -- and the combination of Socialist pay and pension increases and liberal tax cuts naturally led to a budget crisis. Nothing much was done about it after that PM was replaced by another Socialist, what's more, the 2006 campaign was again marked by a competition of unrealistic campaign promises. Then the really bad deficit numbers came in quarter by quarter, while the political mess (demand for recounts, riots) left economic players uncertain about what will be done. When PM Gyurcsány geared up in 'reforms' mode, things went back to normal, the Forint was maintained around 250 again.

(I note a subterfuge here: still in 2006, the Central Bank was ruled by a political appointee of the previous, right-wing governent, and there were several public confrontations on economic policy, and mutual accusations of messing up.)

*Lunatic*, n.
One whose delusions are out of fashion.

by DoDo on Mon Oct 27th, 2008 at 09:01:17 AM EST
[ Parent ]
Well, I obviously am not too well placed to assign causes and effects to these things. What seems clear is that exchange-rate risk is excessive due to the amount of foreign loans, and that EEA free movement of capital is partly to blame. So it is vulnerable to an Asian Crisis if the capital flows reverse and a wave of defaults on foreign loans ensues.

The Forint cannot suffer a Soros-attack-on-the-pound crisis because Hungary is not in the Exchange Rate Mechanism. Now, the ERM exchange rate bands are of +- 15% and the Forint has stayed within that band centered at 250 HUF€ for many years so maybe that could be recognised as a way to facilitate speedy Euro accession.

The problem, however, is that Hungary doesn't fulfill any of the other convergence criteria. It would have to reduce its budget deficit by half, its debt by 10%, and reduce inflation and interest rates, even if it were allowed to count its exchange rate history against the exchange rate stability requirement.

A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith

by Migeru (migeru at eurotrib dot com) on Mon Oct 27th, 2008 at 09:20:22 AM EST
[ Parent ]
Speedy Euro accession = austerity programme with 'reforms'.

I note the reduction of the deficit by half will be nearly done this year (3.4% is the official predicion, inofficial expectation is still lower), but total debt doesn't improve and inflation is to remain far away from the goal.

*Lunatic*, n.
One whose delusions are out of fashion.

by DoDo on Mon Oct 27th, 2008 at 09:38:07 AM EST
[ Parent ]
Speedy Euro Accession looks unpossible.

If there is a real crisis there are two ways out.

  • ECB intervention to shore up the Forint and bail out the Eurozone creditors. This will probably require some sort of counterpart austerity measures. This is the 'Brussels Consensus' version of the Washington Consensus.
  • The EU relaxes its state aid and free capital movement rules to allow Hungary to restructure its private foreign debt.

For either method to work you need the Hungarian government to take things seriously. As far as exchange rate policy goes they seem to be the only Central-Eastern Europe country without one.

A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith
by Migeru (migeru at eurotrib dot com) on Mon Oct 27th, 2008 at 12:32:06 PM EST
[ Parent ]
As far as exchange rate policy goes they seem to be the only Central-Eastern Europe country without one.

From what did you conclude that?

*Lunatic*, n.
One whose delusions are out of fashion.

by DoDo on Mon Oct 27th, 2008 at 06:01:30 PM EST
[ Parent ]
Just an impression from looking at the exchange rate history. Either they don't have one or they're not very successful, compared to CZ and PL.

A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith
by Migeru (migeru at eurotrib dot com) on Tue Oct 28th, 2008 at 04:04:58 AM EST
[ Parent ]
I keep confusing 'cause' with 'exposure'.

A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith
by Migeru (migeru at eurotrib dot com) on Tue Oct 28th, 2008 at 04:10:45 AM EST
[ Parent ]
After checking the graphs properly, true, but I am not sure about the significance. For the Forint, you see one macro-event: the 2006 elections (spending promises atop loose spending) and the following mess, when the budget was under threat to blow up. On shorter timescales, fluctuations are bigger (say 3% for HUF, 2% for CZK and PLN), but not that much. Otherwise, you have no secular trend, that is you have a constant trend. (Indeed people calculated in the head with 250 Forints an Euro by default in the past few years.)

*Lunatic*, n.
One whose delusions are out of fashion.
by DoDo on Mon Oct 27th, 2008 at 08:37:34 AM EST
[ Parent ]
Re: the 250 HUF to the Euro rule of thumb, the problem seems to be that during this year it has fluctuated down 10% and then back up 10% the other way - a 20% swing since July is twice the amplitude of the 2006 shock, in half the time. That would not be a problem were it not for the large number of foreign-denominated loans that Hungarians have taken.

Apparently foreign ownership of Hungarian banks is high, too, so it might be that the Hungarian banks have acted as intermediaries between their customers and their parent companies (like when Abbey started offering Santander Euro mortgages to Britons for property purchases in Spain). So it is unclear what will happen if people start defaulting on these foreign loans.

Is it possible that the Euro is going up against the CEE currencies because Eurozone banks are repatriating capital in order to shore up their balance sheets? We were discussing a similar mechanism regarding the Dollar yesterday, where the Dollar gaining against other currencies is not an indication of strength or a bet on future movements but a consequence of deleveraging by USD-denominated funds.

A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith

by Migeru (migeru at eurotrib dot com) on Mon Oct 27th, 2008 at 08:46:50 AM EST
[ Parent ]
I'm not denying a problem this year...

I shall again emphasize too that the foreign-denominated loan problem just came out of the blue for me, I was totally unaware, don't even know anyone who took such a loan. A speculation bubble there could very well have caused the Forint appreciation in the first half of this year (which, BTW, wasn't looked at kindly by the Central Bank at the time).

Is it possible that the Euro is going up against the CEE currencies because Eurozone banks are repatriating capital in order to shore up their balance sheets?

Could be, but the credit crunch, when jittery investors just draw back to safe havens must be a factor, too (also see CEE stock exchanges).

*Lunatic*, n.
One whose delusions are out of fashion.

by DoDo on Mon Oct 27th, 2008 at 09:18:34 AM EST
[ Parent ]
Forint appreciation in the first half of this year (which, BTW, wasn't looked at kindly by the Central Bank at the time).

As discussed in earlier threads here on ET, the Government can always keep its own currency down if it wishes - by accumulating foreign reserves (in this case Euro and Swiss Franc).

Ultimately it seems as though governments should do just that, accumulating reserves in an amount sufficient to cover the foreign loans that its population/businesses take out.

A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith

by Migeru (migeru at eurotrib dot com) on Mon Oct 27th, 2008 at 09:57:40 AM EST
[ Parent ]
Op-Ed Columnist - The Widening Gyre - NYTimes.com

Some of these disasters were more or less anticipated. Economists have wondered for some time why hedge funds weren't suffering more amid the financial carnage. They need wonder no longer: investors are pulling their money out of these funds, forcing fund managers to raise cash with fire sales of stocks and other assets.

The really shocking thing, however, is the way the crisis is spreading to emerging markets -- countries like Russia, Korea and Brazil.

These countries were at the core of the last global financial crisis, in the late 1990s (which seemed like a big deal at the time, but was a day at the beach compared with what we're going through now). They responded to that experience by building up huge war chests of dollars and euros, which were supposed to protect them in the event of any future emergency. And not long ago everyone was talking about "decoupling," the supposed ability of emerging market economies to keep growing even if the United States fell into recession. "Decoupling is no myth," The Economist assured its readers back in March. "Indeed, it may yet save the world economy."

That was then. Now the emerging markets are in big trouble. In fact, says Stephen Jen, the chief currency economist at Morgan Stanley, the "hard landing" in emerging markets may become the "second epicenter" of the global crisis. (U.S. financial markets were the first.)

What happened? In the 1990s, emerging market governments were vulnerable because they had made a habit of borrowing abroad; when the inflow of dollars dried up, they were pushed to the brink. Since then they have been careful to borrow mainly in domestic markets, while building up lots of dollar reserves. But all their caution was undone by the private sector's obliviousness to risk.

In Russia, for example, banks and corporations rushed to borrow abroad, because dollar interest rates were lower than ruble rates. So while the Russian government was accumulating an impressive hoard of foreign exchange, Russian corporations and banks were running up equally impressive foreign debts. Now their credit lines have been cut off, and they're in desperate straits.

by Metatone (metatone [a|t] gmail (dot) com) on Mon Oct 27th, 2008 at 10:01:08 AM EST
[ Parent ]
In Russia, for example, banks and corporations rushed to borrow abroad, because dollar interest rates were lower than ruble rates. So while the Russian government was accumulating an impressive hoard of foreign exchange, Russian corporations and banks were running up equally impressive foreign debts. Now their credit lines have been cut off, and they're in desperate straits.

Gah - speechless.

A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith

by Migeru (migeru at eurotrib dot com) on Mon Oct 27th, 2008 at 10:06:03 AM EST
[ Parent ]
naked capitalism

A big reason for the worsening of mood in Japan is that its banks, which have heretofore looked solid by global standards, are suddenly looking as if they too might need to raise capital. The reason? Japanese banks, a legacy of the zaibatsu days, hold substantial equity positions in other companies (note these stockholdings are much smaller than they were in the bubble years, when banks were important members of industrial groupings, later called keiretsu as the linkages weakened). The BIS, in a concession to this Japanese peculiarity, allowed a portion of the value of these shares to be counted towards regulatory capital requirements (forgive me for not checking the current rules, but it used to be 50%).
by Metatone (metatone [a|t] gmail (dot) com) on Mon Oct 27th, 2008 at 10:16:47 AM EST
[ Parent ]
Good cath. In CEE, too, the foreign-denominated loan problem is not one of public finances but consumers'.

*Lunatic*, n.
One whose delusions are out of fashion.
by DoDo on Mon Oct 27th, 2008 at 04:43:12 PM EST
[ Parent ]
From what I know, that's just what the Central Bank did.

BTW, here is a direct comparison courtesy of the Hungarian Central Bank (pdf!) -- what can you make of it?

Maybe we should do a Socratic Economics on this. I can't promise much understanding, but I can get you all kinds of graphs and data from the Hungarian Central bank and the statistical office.

*Lunatic*, n.
One whose delusions are out of fashion.

by DoDo on Mon Oct 27th, 2008 at 04:47:01 PM EST
[ Parent ]
Here is the graph that says it all -- development of net household credit uptake:

Thick grey: total, thin grey: consumption and other credit, red: housing credit in Forints, green: in forex

*Lunatic*, n.
One whose delusions are out of fashion.

by DoDo on Mon Oct 27th, 2008 at 05:19:31 PM EST
[ Parent ]
Interesting that it started before EU accession... What is meant by "housing credit"?

A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith
by Migeru (migeru at eurotrib dot com) on Mon Oct 27th, 2008 at 07:25:53 PM EST
[ Parent ]
A broader term that includes all kinds of credits given for buying houses. I translated the Hungarian word literally because I'm not sure how much of that is covered by the Anglo terminology of "mortgage": say if the cover is not the house but having a fixed income and paying for 30% of the house price from the pocket, is that a mortgage?

It started before EU accession probably in the form of delayed payment credits.

*Lunatic*, n.
One whose delusions are out of fashion.

by DoDo on Tue Oct 28th, 2008 at 05:33:44 AM EST
[ Parent ]
Lets just say 'real estate credit' to avoid 'mortgage'. It is shocking that the domestic credit has gone negative.

A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith
by Migeru (migeru at eurotrib dot com) on Tue Oct 28th, 2008 at 06:47:14 AM EST
[ Parent ]
Since real estate would include commercial interests, too, what about homeowner credit?

As for domestic-denominated credit going negative, what does that mean at all? Interest payments, or (early) repayments (refinancing)?

*Lunatic*, n.
One whose delusions are out of fashion.

by DoDo on Tue Oct 28th, 2008 at 07:54:10 AM EST
[ Parent ]
Well, this is 'household credit after all' - but a precise term is a bit beside the point.

I have no idea how net debt can be negative - as it has been since 2006.

A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith

by Migeru (migeru at eurotrib dot com) on Tue Oct 28th, 2008 at 10:26:04 AM EST
[ Parent ]
Do you mean housing or household?

A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith
by Migeru (migeru at eurotrib dot com) on Tue Oct 28th, 2008 at 04:07:04 AM EST
[ Parent ]
I used both, and both appropiately: the aggregate figure (thick grey line) is total credit for households, the two highlighted elements of it are credit to households for buying homes, e.g. housing credit.

*Lunatic*, n.
One whose delusions are out of fashion.
by DoDo on Tue Oct 28th, 2008 at 05:36:10 AM EST
[ Parent ]
So you're saying the foreign credit is mortgage credit?

A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith
by Migeru (migeru at eurotrib dot com) on Tue Oct 28th, 2008 at 05:44:45 AM EST
[ Parent ]
I'm not saying anything, but from the Central Bank's graph, it does indeed appear that foreign-denominated credit in the household sector is chiefly homeowner credit. (There are foreign-denominated credits in the commercial sector, too.)

*Lunatic*, n.
One whose delusions are out of fashion.
by DoDo on Tue Oct 28th, 2008 at 07:55:18 AM EST
[ Parent ]
I guess I can't make anything better than what would come out of a factor analysis...

A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith
by Migeru (migeru at eurotrib dot com) on Mon Oct 27th, 2008 at 07:22:33 PM EST
[ Parent ]

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