The financial crisis spreading like wildfire across the former Soviet bloc threatens to set off a second and more dangerous banking crisis in
Currency pegs are being tested to destruction on the fringes of
Experts fear the mayhem may soon trigger a chain reaction within the eurozone itself. The risk is a surge in capital flight from
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.
Stephen Jen, currency chief at Morgan Stanley, says the emerging market crash is a vastly underestimated risk. It threatens to become “the second epicentre of the global financial crisis”, this time unfolding in
Exposure is 50pc of GDP for
Amazingly, Spanish banks alone have lent $316bn to
Broadly speaking, the US and
The region has borrowed $1.6 trillion in dollars, euros, and Swiss francs. A few dare-devil homeowners in
The IMF’s experts drafted a report two years ago –
It is just blood in the water for hedge funds sharks, eyeing a long line of currency kills. “The economy is not strong enough to take it, so you know it is unsustainable,” said Simon Derrick, currency strategist at the Bank of New York Mellon.
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.
Traders are paying close attention as contagion moves from the periphery of the eurozone into the core. They are tracking the yield spreads between Italian and German 10-year bonds, the stress barometer of monetary union. The spreads reached a post-EMU high of 93 last week.
Nobody knows where the snapping point is, but anything above 100 would be viewed as a red alarm. The market took careful note on Friday that
Hans Redeker, currency chief at BNP Paribas, says there is an imminent danger that
“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
A grain of comfort for British readers: