Sit Down Einstein, Euro Facing Meltdown

The euro fell against the dollar yesterday after European Union leaders vetoed Hungary’s request for 180 billion euros of loans to former communist economies in eastern Europe.

Meanwhile, the Swedish krona fared even worse, falling to a record low versus the euro on speculation the Baltic region’s borrowers may default, and the Hungarian forint and Polish zloty also tanked.

Eastern Europe is a very important key element in this giant mess that we find ourselves in. Vast numbers of ordinary people there have mortgages in Swiss francs, euros and even Japanese yen. For example an estimated 60% of Polish mortgages are in Swiss francs.

And if your local currency goes down the pan, your mortgage repayments go through the roof. So you default. Einstein is not required on this one.

The problem is that western European banks have invested heavily in Eastern Europe. So heavily that 75% or more of the banks in Romania, Poland, Latvia, Hungary, Bulgaria, Lithuania, Czech Republic, Slovakia and Estonia are owned by Western European banks. Fancy that, our banks making unwise and rash loans to any Thomaz, Dik or Uri.

Eastern Europe currently has $1,656 billion worth of loans outstanding, according to latest estimates. Of that, it is reckoned that 90% comes from western Europe, and $350 billion is due to be repaid, or rolled over, in 2009. Where is the money going to come from, and/or who is going to roll over that debt from in the current climate?

Top of the Pops for exposure to eastern Europe is Austria, and Sweden are pretty close to the top of the list too, although just about every western European country has significant exposure here. So eastern Europe comes a callin' asking for more help, at a time when the banks in western Europe are all reeling and reporting massive losses of their own. What response are they going to get?

Sit down Einstein.

It seems like eastern European defaults on a large scale are somewhere shortly down the line. And that spells disaster for the euro, and quite probably the pound too.