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Thu, Oct 30th 2008, 15:19

Meredith L. Nicoll, Altantic Community, Silver Contributor (45)

For more information on this topic, see this article in The Statesman:

http://www.newstatesman.com/economy/2008/10/european-banks-crisis-imf

It is more extensive on exactly how dirty Europe's hands apparently are.

Thu, Oct 30th 2008, 18:17

Donald Stadler, Self-employed, Diamond Contributor (1052)

Thank you for that link, Meredith. I sat down and added up some figures last week after I saw another piece with similar numbers. The US mortgage crisis is roughly forecast as amounting to about $1.2 trillion total, of which about half has already hit home and is being dealt with.

That is about 9% of US GDP. Add the 4% of US GDP exposure to emerging markets and that is a total of 13% of US GDP exposure to troubled assets, a total of $1.7 trillion.

European exposure to emerging markets is about $3.5 trillion. Given that the EU has a collective GDP about equal to the US, this means an exposure of perhaps 27% of GDP EU wide, not counting Europe's own potentially troubled property markets (in Spain, France, Italy, Ireland, nd Eastern Europe). Germany has already sustained losses of $22 billion from the Icelandic meltdown, but we don't have figures for other exposure except to assert it is likely a lot worse than that.

Some that debt should be OK, one would think. I believe investments in factories and other production facilities in Eastern Europe will pay out in the end. But the 200,000 euro city centre flats in Latvia, skiing lodges in Bulgaria, etc may be a lot more of a problem. I was amazed to learn that Spain has lent $326 billion to Latin America, that is almost twice the figure for the entire US, I think.

One more thing. This has been portrayed as something which occurred on Wall Street only, but that doesn't appear to be actually at all true. The more information which comes out, the more we learn about dodgy banking in London, Zurich, and even (gasp) stodgy old Frankfurt. Not to mention Moscow, Tehran, Madrid, Paris, and other places. In fact it appears that some of the better banking occurred in the US as well as some of the worst.

The bottom line may well be that the US and Japanese banking systems are a lot more sound than the Europeans, and if a rescue needs to be mounted it may be the US, Japan, and China which may have to save European banks.

This is not a duty of these countries, mind you, but it may be necessary in our self-interest. But if this is so European countries which may be in better shape than average (such as Germany) won't be allowed to sit it out and make outsiders do all the dirty work, as appears to be current policy.