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European Banks to be Hit by Collapsing Emerging Markets

Stock-Markets / Credit Crisis 2008 Dec 01, 2008 - 04:28 AM GMT

By: Money_and_Markets

Stock-Markets Best Financial Markets Analysis ArticleJack Crooks writes: Most investors are understandably fixating on the spectacle of the U.S. debt crisis and Washington's $7.8 trillion in loans, investments, commitments and guarantees designed to end it.


So when a significant deadline passed two weeks ago in a remote corner of the global economy, virtually no one noticed. It's a small event with big implications … that provides a valuable clue to the shoe that's most likely to drop next in this crisis … and that also presents you with one of your best opportunities for profits.

The news that gets lost in the cacophony of reports about the U.S. economy is this: Two major crises now hammering emerging nations:

First, sinking exports. Over the last few years, the historic economic growth in emerging markets like Ukraine, South Korea, the Czech Republic, Poland, and others was driven almost entirely by demand for their exports from the U.S. and Europe.

Now, with the U.S. and Eurozone economies sliding, that demand has started to evaporate. And because these countries have little domestic demand to drive their economies, they've suddenly been thrown into a struggle for their very survival.

Second, plunging oil. As the economic crisis has slashed oil prices by nearly two-thirds, oil-producing emerging nations — Russia, Venezuela, Ecudor and others — are suddenly starving for cash to pay their bills.

Combined, these two events are now conspiring to set off a chain reaction that will bring the biggest creditors to these emerging markets — such as Europe and the UK — to their knees. When the history books are written, two key dates will be cited as moments when critical warnings were clearly telegraphed, duly recorded and promptly ignored until it was too late:

Key Date #1: Thursday, November 13. Seventeen days ago, the government of Ecuador failed to pay interest on bonds it had sold to investors. Citing plunging oil revenues, the government postponed its interest payments for a full month.

Key Date #2: Monday, December 15. Fifteen days from today, Ecuador must make those interest payments plus interest for the month of November. If it fails — if Ecuador defaults on its government bonds — it's could be first the domino in a chain reaction of government debt defaults that will sweep the globe.

Tiny Ecuador: The Canary in the Coal Mine

Is Ecuador a big player? Of course not. But it's merely the first one.

As you read this, governments throughout Asia and Europe are facing similar circumstances: Foreign demand for the products they produce is virtually non-existent … their own citizens are unable to buy the products their factories produce … and even oil producing nations are starving for cash as energy prices crater.

Russia is now begging China for a $25 billion loan to save its cash-strapped energy companies. Its foreign currency reserves have plunged $122.7 billion — a full 21% — in just 3 ½ months. Foreign investors are stampeding for the exits.

A few days ago, leaders from 21 nations, the International Monetary Fund (IMF) and three other international organizations attended an emergency, two-day summit to address the catastrophe among emerging nations. Japan pledged $100 billion for emergency loans to the governments of South Korea, India, Indonesia and other economies and urged other potential donor nations to do the same.

Similar stories can be told about dozens of emerging economies throughout Asia, Eastern Europe and Latin America: They're drowning in debt they built up during the good times … and now, with their exports vanishing before their very eyes, their economies are cratering.

Why should we care that these emergency economies are on the verge of collapse?

Because …

European Banks Loaned These Countries A Staggering $3.5 Trillion. When They Go Down, So Will Europe's Largest Banks!

Fortunately for us, U.S. banks loaned only $500 billion to these emerging markets and Japanese banks loaned them only $200 billion. But European banks loaned them a whopping $3.5 trillion — five times more than the U.S. and Japan combined.

Amazingly, European banks loaned these countries amounts so large they're the equivalent of a whopping 21% of their Eurozone's total GDP, according to Bank for International Settlements. And when you look at individual countries, the numbers are even larger:

In Sweden, banks loaned an amount equal to 25% of that country's GDP …

Swiss banks loaned the equivalent of 50% — fully HALF — of Switzerland's total GDP …

And Austrian banks loaned an amount equal to 85% that nation's GDP — with 80% going to the countries in Eastern Europe that are now suffering the greatest economic pain of all!

Now, these emerging markets are being squeezed mercilessly. Investors are fleeing. Credit is as rare as hens' teeth. Exports are slumping and income is vanishing.

Now, as these once-emerging countries sink into depression, those loans are beginning to go sour. European banks are ALREADY getting hammered for huge loan losses — and investors who own their shares are ALREADY getting slammed. My forecast: You're going to see …

  1. Huge loan defaults in emerging markets like Ecuador, Hungary, Ukraine, and Argentina …
  2. Massive losses and even outright failures among Europe's largest banks …
  3. Panic selling on stock exchanges throughout the Eurozone …
  4. A massive flight to safety — OUT of euros …
  5. Windfall profits for investors who know how to profit from the euro's plunge.

To learn how, click here .

Best wishes,

Jack

This investment news is brought to you by Money and Markets . Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com .

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