Notes From Underground: (An oldie but goody- Next?)

We at Notes From Underground have been writing about the Greek crisis since the end of November. Since this is still so timely, here is a post from Dec. 15.

Just when you think you are out, they drag right back to relive the pain. The Greeks set the tone to the debt problems of Europe last week following hard on the heels of the Dubai insolvency news. We have written extensively about the peripheral countries of the EU being the biggest problem–and they are–but a new credit problem popped up overnight.

Austrian Bank, Hypo Alpe Adria, had to be nationalized by the staid Austrian governement after its loan portfolio imploded. The amount is not insurmountable but its ramifications could be an enormous impact. Austria has been a very active lender to the developing states of Central and Eastern Europe (CEE). Swiss and Austrian banks have lent large amounts of euros and Swiss francs at low interest rates for the development of former communist Eastern Europe. As the global debt crisis took hold, many of these loans have gone upside down and left the borrowers with negative capital. As a result, the governments have taken the side of the borrowers whose votes they need. The weak DOLLAR has also hurt as the loans were taken out in Francs and Euros because of the cheap rates. As the loans have had to be paid back in appreciated currencies, the pain has been even greater.

The biggest disaster about this bank collapse is the effect it may have on the attempted bail out of Greece or any other country in Europe. German Banks have a stake in this as they previously owned Hypo Alpe. How much money will be forthcoming from Germany we don’t know but it is sure to sour the German populaces taste for bailing out others. It will keep the ECB from any tightening until they can take a full measure of its impact. Tomorrow is an important funding day for European banks as the ECB makes available in their “long term refinancing operations” (LTRO). We will need to watch how much money is sought–the market has been expecting 125 billion but now there may be upward pressure for more. Again, we wish to reiterate that the real fallout in this new credit crisis will effect the mood to limit any other further bailouts as the European Union is being taxed to its limits. Also, the stress in Austrian credit could prove a problem as Austria is a hub for natural gas transport from Russia to the Western European states. We saw what Gazprom did to the Ukraine in 2008 when they were in arrears on energy payments. As the credit crunch continues to expand, we are reminded of the lyrics to Jacques Brel’s “Next.”

… I was still just a kid

when my innocence was lost

In a mobile army whorehouse

Gift for the army,free of cost


Yes, the credit markets certainly reflect a young soldiers desires for a moment of passion only to come away with gonorrhea.

We saw the negative divergence continue on as the S&Ps and other equity markets held up remarkably well. Even with the DOLLAR gaining further ground, the equities found support lending greater credibility to our view about the turn in the carry trade. The intriguing point from our view is that the YEN was very weak today even with risk trades coming off and the structural problems unfolding in Europe. If the YEN were to again become the funding vehicle, the financial landscape would have a new source of liquidity, and unlike the DOLLAR, the Japanese would welcome a weakened YEN. Nothing could be worse for Japan than to have deflation with a strengthening currency. This will be a setback for any hope of a Japanese recovery. This new funding currency in a global low interest rate environment may be a spark for risk investments everywhere–maybe even GOLD.

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