WSJ: Banks Reel On Eastern Europe's Bad News

While I am in a backwards way happy to see some of my Outlier Predictions for 2009 coming true (already!), it is frankly quite scary to see all these bad events happening in such short order. In my 13 Outlier 2009 Predictions written just 2 months ago I wrote

#12 Wildcard/Europe: Potential defaults on debt arise in a host of smaller countries - especially of the Eastern European variety. I don't know which ones, but they have been mini U.S.'s, borrowing over and above their head, but unlike the U.S. do not enjoy the fact the entire world rushes into their debt market when a crisis emerges. The opposite will happen - Iceland & Ecuador are just the precursor.

It appears we have Thai bhat 2.0 (you can google it if you were not around in the late 90s) We have seen rumblings of this in foreign newspapers (UK) the past few days but today it hit the front page of the Wall Street Journal so now it matters all the sudden....

• Fears of a full-blown economic crash in Eastern Europe shook the region's currencies and the share prices of Western banks doing big business there, helping to spur a new shock to financial confidence around the globe.
• Some market analysts warned of a regional economic collapse on the scale of the Asian crisis in the late 1990s, as a report by the Moody's ratings agency warned it may downgrade banks active in Eastern Europe. The cost of insuring government debt from Poland to Russia rose further, while currencies fell. The Hungarian forint slid to an all-time low Tuesday against the euro. Poland's zloty fell to a near-low against the euro, and is down by a third since August, prompting Warsaw to announce Tuesday it would intervene to prop up the currency if it fell further.
• The new evidence of enduring problems for Western banks -- and for the emerging markets they've invested in -- helped markets tumble around the globe, with financial stocks leading the way down.
• After years in which Eastern Europe attracted investment for its fast growth and increasing financial ties with Western counterparts, the region's fortunes have abruptly reversed -- largely the result of oversized dependence on foreign-currency loans that now are leading to rising defaults, and fast-dwindling demand by its Western neighbors for its exports amid the global slowdown.
• "To us this looks like a market meltdown on the same scale as occurred during the Asian crisis of 1997" that began with the devaluation of the Thai baht, said Lars Christensen, chief analyst at Denmark's Danske Bank Group, in a research note Tuesday. Mr. Christensen wrote a paper in 2006 accurately predicting the eventual meltdown in Iceland.
• The volume of capital flowing into emerging European economies is expected to fall to just $30 billion in 2009, from $254 billion in 2008, according to Institute of International Finance, an association of the world's largest banks. The group called the swing "unprecedented in scale." It expects foreign bank lending to swing to the negative by $27.2 billion in 2009, meaning banks will collect more than they loan.
• Deep slides in currencies raise the prospect of widespread defaults on foreign-currency loans marketed by a growing roster of foreign-owned banks and taken out by businesses and individuals, who were attracted by better interest rates offered in euros and Swiss francs. Now those troubled loans are boomeranging on the Western banks that charged into the region in the past decade, competing heavily to buy up local banks and establish subsidiaries in what was Europe's biggest growth area. Austria-based banks, for example, had some €278 billion in exposure to emerging Europe, according to September statistics from Bank for International Settlements. That equals nearly two-thirds of Austria's gross domestic product.
• The economic distress and currency tumbles in Eastern Europe will "trigger a write-down into the Western European banking system," says Hans-Guenter Redeker, a currency strategist at BNP Paribas in London. "The question is how much." He says a conservative estimate would be about 20% of the total invested by such banks in the region. Moody's estimated the total at $1.3 trillion at the start of 2008.