How much trouble is Europe in?

The 2008:Q4 figures for the EU-countries came out recently.  It’s not pretty.  But a regular recession is nothing compared to what might be coming.

In the understatement of the day, Tyler Cowen writes:

It’s a little scary:

Stephen Jen, currency chief at Morgan Stanley, said Eastern Europe has borrowed $1.7 trillion abroad, much on short-term maturities. It must repay – or roll over – $400bn this year, equal to a third of the region’s GDP. Good luck. The credit window has slammed shut….

“This is the largest run on a currency in history,” said Mr Jen.

The naked capitalism entry that Tyler points us to is itself a wrapper for this article in the Telegraph.  It’s a little hyperbolic, but if the facts it’s listing are correct, not overly.  Here are a couple of paragraphs from it:

Whether it takes months, or just weeks, the world is going to discover that Europe’s financial system is sunk, and that there is no EU Federal Reserve yet ready to act as a lender of last resort or to flood the markets with emergency stimulus.

Under a “Taylor Rule” analysis, the European Central Bank already needs to cut rates to zero and then purchase bonds and Pfandbriefe on a huge scale. It is constrained by geopolitics – a German-Dutch veto – and the Maastricht Treaty.

To this mess we can add the case of Ireland.  Simon Johnson, writing at The Baseline Scenario, observes:

Look at the latest Credit Default Swap spreads for European sovereigns (these are the data from yesterday’s close).  As we’ve discussed here before, CDS are not a perfect measure of default probability but they tell you where things are going – and changes within an asset class (like European sovereigns) are often informative.

European CDS have been relatively stable – albeit at dangerously high levels – for the past month or so.  But now Ireland has moved up sharply (the green line in the chart).  We’ve covered Ireland’s problems here before (banking, fiscal and – big time – real estate); type “Ireland” into our Search box for more.

Interesting times …

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