Some Eastern European countries are experiencing severe problems, with Latvia being one of the worst. That’s creating risk in Western European banks, which loaned heavily to emerging markets. The chart above shows risk for banks due to loans to other nations with a high credit risk. Note that the country whose banking system carried the most risk – Iceland – is all but wiped out.
“It is East Europe that is blowing up right now. Erik Berglof, EBRD’s chief economist, told me the region may need e400bn in help to cover loans and prop up the credit system. Europe’s governments are making matters worse. Some are pressuring their banks to pull back, undercutting subsidiaries in East Europe. Athens has ordered Greek banks to pull out of the Balkans.
“The sums needed are beyond the limits of the IMF, which has already bailed out Hungary, Ukraine, Latvia, Belarus, Iceland, and Pakistan — and Turkey next — and is fast exhausting its own $200bn (e155bn) reserve. We are nearing the point where the IMF may have to print money for the world, using arcane powers to issue Special Drawing Rights. Its $16bn rescue of Ukraine has unravelled. The country — facing a 12% contraction in GDP after the collapse of steel prices — is hurtling towards default, leaving Unicredit, Raffeisen and ING in the lurch. Pakistan wants another $7.6bn. Latvia’s central bank governor has declared his economy “clinically dead” after it shrank 10.5% in the fourth quarter. Protesters have smashed the treasury and stormed parliament.
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