The Global Economy: How The Credit-Crippled Europeans Could Sink Your 401k
Friday, February 20, 2009
by Marc Lichtenfeld, Senior Analyst & Healthcare Specialist, Smart Profits Report
If the global economy were a hospital patient, you’d definitely find it in the Intensive Care Unit.
It’s not on life support just yet, but it certainly finds itself in an increasingly precarious position, due to the numerous negative factors swirling around the financial world.
One of these factors is something you might not be aware of, given the furor here in the U.S. It’s happening half a world away over in Eastern Europe and is just beginning to get some attention now.
So pack your bags and I’ll fill you in…
Pain In Prague And Poland
In Eastern Europe, the economic problems are two-fold…
1. The region is experiencing a similar downturn to the one in the U.S.
2. Local currencies are enduring a significant slide against the euro.
For example, the FOREX exchanges in Prague (Czech Republic) and Warsaw (Poland) have hit multi-year lows. And so-called “toxic foreign currency options” have sent the Polish Zloty into a downward spiral.
So while on the surface, you may see that Eastern Europe has enjoyed strong growth over the past couple of years, scratch below it and you’ll find that this growth was fueled by credit.
Today, citizens in countries like Poland and Romania are losing their jobs and having trouble paying their loans. Sounds familiar, huh?
But just to make matters worse, many of the banks either lent money in euros or receive money from their parent banks in the same. So even if the loans are paid back, they’re worth as much as one-third less because of the falling currencies.
It Wasn’t Just Americans Sucked In By Cheap And Easy Money
We’ve heard a ton about how some American banks got carried away with the availability of easy credit and started dishing out money to practically anyone who asked for it.
But it’s a similar situation in Europe. Austrian, Swiss, German and Italian banks own a majority of banks that do business in Eastern Europe. And these foreign banks have lent boatloads of money to countries such as Poland and Romania.
Not a good predicament to be in, to say the least… not for anybody.
According to The Economist, Austria has lent $230 billion euros to the region, which is equal to about 80% of its GDP - a mind-blowing amount.
And the chickens are coming home to roost now, with Austria’s finance minister, Josef Proll quoted thus in Vienna’s Der Standard newspaper: “A failure of 10% would lead to a collapse of the Austrian financial sector.”
Nope… Not good at all.
The European Bank for Reconstruction and Development estimates that bad loans will make up 10% to 20% of total loans. And the fact that Eastern European countries have to repay - and presumably reborrow - $400 billion this year is a mighty tough number to meet in the tight credit market.
A recent Bloomberg article even floated the notion that big countries like Germany and France might be forced to bail out not just banks, but entire countries.
Because of this, it’s quite reasonable to imagine that if big European banks start falling apart as a result, we’ll experience the ripple effect in the U.S. And with the investor psyche already perilously fragile, quite frankly, our markets can’t suffer another systemic crisis without severe ramifications.
So what’s the solution?
If Eastern Europe Goes South, Head For The Exits
There are some who argue that Eastern Europe is fertile enough ground that foreign banks will do whatever it takes to ride out the storm. After all, those banks have generated meaningful profits in that neck of the woods in the past, and they’ll doubtlessly want to do so again when the smoke clears.
But while they’re probably right, it’s certainly worth monitoring this situation. If it gets worse, you can expect rapid deterioration in our markets as well as the contagion spreads. You’ll want to move your money to safe investment vehicles and fast.
The flight to safety could include assets like the U.S. dollar, which could benefit as Europe’s currencies head south. But this in itself is a risky bet, given its volatility.
As we’ve stated here several times over the past few weeks, we think gold investing is one of the best options at the moment. In addition to highlighting a lesser-publicized reason why gold could head even higher from here, we’ve also alerted you to a gold price indicator that can tip you off on when the metal could rise, plus reasons why you should invest in gold.
And our commodities expert has given his own outlook for the yellow metal in his “Commodities Corner” column over the past few editions. Make sure you check out his gold price projections here.
Marc
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