These Two Countries Could Slide Into Bankruptcy
Wednesday, March 11, 2009
by Martin Denholm, Managing Editor, Smart Profits Report
“We take the view that we don’t need to make a further effort.”
So said Jean-Claude Juncker, Luxembourg’s Finance Minister, following a meeting of European financial bigwigs in Brussels on Monday.
As a European, such statements come as no shock to me. Europe is well used to its leaders being stuck well behind the curve when it comes to taking proactive economic measures and helping out the countries under its jurisdiction.
And Juncker’s statement should reaffirm to concerned Europeans everywhere that the powerful purse-string pullers are in “wait and see” mode - even as the World Bank projects the most serious global recession in post-war history, as trade slows to the slowest rate in eight decades and global industrial output slumps by 15% from 2008. As the International Monetary Fund says the global economy will shrink this year for the first time in decades. And as the European region collapses around them.
Exhibit A: Jean-Claude Trichet, president of the European Central Bank…
Same Old Story From “Old Europe”
Having chopped the 16-nation Eurozone interest rate from 2% to 1.5% recently, Trichet’s words seem to suggest “job done” as far as he and his fellow bankers are concerned.
In Switzerland last week, he said the bank has identified “a number of elements in the global economy which are expansionary” and that “we’re approaching the moment where we’re having a pickup.”
Meanwhile, European Union Monetary Affairs Commissioner Joaquin Almunia is busy saying that “downside risks have increased,” with a “scenario for a gradual recovery translated to 2010.”
So much for the IMF’s desire for greater coordination among global economies to drag the world out of the mire. Two of Europe’s most influential figures can’t even get on the same page.
And Germany’s finance minister, Peer Steinbrueck, says his government is “not even discussing any additional measures” to stimulate his country’s economy, which is Europe’s largest. To be fair, they’re waiting to see what impact their recent 50 billion euro ($63.4 billion) stimulus package will have on the German economy, but nevertheless, some of the complacency from Europe’s powers-that-be is alarming.
Particularly in the face of two stark warnings…
Switzerland On The Slippery Slope To Bankruptcy?
Given the highly respected reputation of Swiss banks, it seems impossible to think that the country could go bankrupt.
But those very same banks that have contributed so much to this reputation are now in danger of bringing the country to its knees. At least according to one economist…
Artur Schmidt says even Swiss banks succumbed to the rash of overly exuberant lending that has marked American banks over the past couple of years. In fact, they’ve run such a loose credit line to emerging markets economies in Eastern Europe that the country is now in danger of going bankrupt because these emerging nations, crippled by the economic crisis, now can’t pay the money back.
While this lending fueled Eastern European economic growth (because countries often found it cheaper to loan money in Swiss francs than in their own currencies) and further boosted the franc’s existing “safe haven” reputation at a time when other currencies were struggling, there are some serious ramifications now.
As Eastern Europe’s emerging market foundations crumble amid the global crisis, borrowers can’t repay the money. And with currencies now sliding, Swiss debt has shot up by more than one-third, says Schmidt.
That could result in the unthinkable: A huge drop in the value of the Swiss franc and even a downgrade to its famed credit rating. Or, in Schmidt’s words, the franc could become a “soft, unstable currency.”
So far this year, the ETF that represents the Swiss franc - the CurrencyShares Swiss Franc Trust (NYSE: FXF) has suffered from the situation, dropping by 8.5%. If you’d like to play this trend, the ETF trades just like a stock and also has options available. Meantime, the iShares MSCI Switzerland Index (NYSE: EWL) ETF, which represents the price and yield performance of publicly traded Swiss companies, has fared even worse, plunging 25% this year.
Baltic Bust
If Swiss bankruptcy still seems implausible, it’s much more realistic in Latvia.
In fact, the country’s Premier-designate, Valdis Dombrovskis, says it could go bust in June if it’s not able to adhere to the budget cuts set out by the IMF - a situation that could delay its ongoing bailout installment package.
Latvia certainly didn’t foresee a crisis of these proportions when it became an independent nation in 1991. But with its economy tumbling by 10.5% during the last quarter, the country received a 7.5 billion euro ($9.5 billion) bailout. The political machine was then thrown into disarray amid haggling over how to implement the necessary cuts that would keep the country’s budget deficit below 5% of GDP.
Dombrovskis is currently heading up a five-party coalition, which plans to cut spending by 360 million lati ($642 million) - well below the 700 million lati needed to achieve that goal. But Dombrovskis argues that the 5% target is unrealistic, as it was based on a 5% economic contraction when current forecasts call for closer to 12%. He wants more leeway from the IMF and is lobbying for a deficit cushion of 8% of GDP instead in order to ensure the next loan payment.
His argument carries some weight, too. If Latvia fails, so too could neighboring economies like Estonia (whose economy just suffered a 9.4% annual fall, the worst in 15 years) and Lithuania, whose GDP contracted for the first time in nine years. It would also impact larger nations like Sweden, which is heavily invested in Latvian banks.
Watch this space. Europe has pumped in billions in stimulus money to stave off an economic crisis, with budget deficits rising as a result (the European Union projects a doubling of the EU budget shortfall to 4.4% of GDP this year). But while some seem content to wallow in their efforts, situations like these show that unfortunately, the job is far from over.
Martin Denholm
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3 Responses to “These Two Countries Could Slide Into Bankruptcy”
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I found this article very difficult to follow. After discussing the Eurozone, Luxembourg,Germany, Eastern Europe Switzerland and Latvia, it was not at all clear which were the 2 countries that could slide into bankruptcy.
It would be nice to know without trying to guess.
I usually agree with most of the comments here but have to disagree with comparing Switzerland to Latvia when it comes to possible country bankruptcy.
Sure, UBS has been seriously affected by its participation in the sub-prime market and has extended large amounts to Eastern Europe. But, even this large bank does not represent the entire Swiss economy which has considerable economic base. A weaker Swiss franc for instance would make exports a lot cheaper and Switzerland has a sizable real economy of strong, export oriented companies. I don’t know of any in Latvia or for that matter Iceland, which is near bankruptcy.
The Australian deputy opposition leader, Julie Bishop, has recently been whining about Stern Hu being separated from his family for a couple of weeks as a result of his imprisonment in China. As an English migrant to Australia in 1973, I have been denied any contact with, or news of, my two sons for over 34 years, courtesy of the Australian Family Court, yet I have never been charged with breaking any of Australia’s laws. nor with any abuse or impropriety towards my sons. And what does Julie Bishop, or any of the corrupt political trash that perennially misrules Australia, care about that?
I used to work in the Australian Department of Foreign Affairs until I saw the sort of outrages which were routinely perpetrated by government against totally innocent people (e.g. Mohamed Hanif, Cornelia Rau, Vivien Alvarez-Solon, etc. ) Instead of going to work overseas and telling the world what a fine government Australia had, I chose to walk out. Unfortunately those people are not paid to have a conscience, but only to keep their mouths shut.