Eastern Europe May Start A Domino Effect Of Defaults

Latvia, Poland, Ukraine…why worry about what’s going on in the countries of Eastern Europe? Because Western European banks are overextended with loans to these countries, and our banks have their share of exposure too. Last night there was an incredible de-coupling of the dollar vs. other world currencies, resulting in a huge flight to the relative safety of the dollar. It’s not clear to me who was involved, but the coordination suggests it was a huge institution, possibly even a country. The trades began around 7pm CT last night, and though many are saying it was caused by “program trading” or “automatic trading”, it looked more like a forced liquidation to me. The ability to move the currency markets so dramatically takes trillions, so there are some giants involved.

Ukraine’s economy is on the edge. Austria’s finance minister warned last week of the risk of an economic “catastrophe” in the country triggering a “domino effect” of problems further west. Today, he resigned amid differences over budgetary policy that delayed the second part of a $16.4 billion International Monetary Fund loan, due this weekend. The IMF is demanding a balanced budget before it releases the dough. When the finance ministers start to resign, folks, things are bad. Japan’s resigned yesterday after being drunk at a G-7 press conference the other day.

I don’t like saying this, and our dear readers may think my last name is Doom, but one of these countries is going to default. Ireland may beat them to the head of the line, but I don’t see how the defaults can be prevented. The IMF doesn’t have enough money to save anyone else, although it has arcane powers to print money. Either scenario is not good. A default in Eastern Europe will most likely cause a wildfire to spread to Western European banks. If one of those countries pulls an Iceland, or worse, an Argentina…look out below.

Much of the debt around the globe is denominated in dollars, and this widening of the gap between local currencies and the dollar only makes repayment of those debts more difficult. Ben Bernanke extended credit swaps (essentially loans) around the globe in November, and it is looking like many of them will become uncollectable. Barry’s going to sign Porkulus today, but he’s not fooling many that the socialist-fest will help our economy much. As huge as it is, it is minute compared to the massive numbers represented by global derivative exposure. Our stock market is tanking this morning, as has been the case lately when the dollar strengthens. Please be cautious, dear readers. Times have become incredibly tenuous.

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