Monday, February 23, 2009

Revisit - How Bad Can it Get?

By Mr. Quarter

A couple of posts back, I mentioned the potential economic bomb that lurks in central and eastern Europe. As reported today in the Financial Times, the possibility of a financial collapse there could bring down the Eurozone. Policy errors by the governments in central and eastern European countries contributed to this looming economic explosion and the most egregious was that they encouraged households to obtain mortgages in foreign currencies.

In Hungary, for example, almost every mortgage is a foreign currency mortgage, mostly denominated in Swiss francs because of cheap Swiss interest rates. Net effect? Hungarian homeowners get farther and farther behind as the Hungarian forint falls against the rising Swiss franc.

So how could this bring about the collapse of the the "Eurozone?" The central and eastern Europeans made sure their banks were owned by foreigners, and in particular, Austrian, Italian and Swedish banks own a large chunk. The Financial Times reports that the exposure of Austrian banks to eastern Europe mortgage debt is about 80 per cent of Austria’s gross domestic product. If Hungarian households default, it is not Hungary that will go down, but Austria, and/or Italy and Sweden - a systemic event.

1 comment:

The Deuce said...

I sure am glad I've read all the great Science Fiction dystopian novels. Global economic collapse is followed by the end of modern monetary systems...paper money is worthless. National transportation grid abruptly stops creating a panic run on grocery stores and pharmacies as trains and trucks are no longer running. Shelves are barren in hours. Coal fired power plants run out of coal in 30 days and the national power grid collapses. All economic activity is transacted in gold, silver or by barter, resulting in local trading only. Millions die in just weeks for lack of life saving drugs. Tens of millions die in months due to starvation, social unrest and pandemic outbreaks of flu, cholera and plague. The second Dark Age begins.
But hey, at least we got that population problem under control.