[Marxism] NYT op-ed warns crisis in E. Europe is major threat to Euro banks, economy

Fred Feldman ffeldman at bellatlantic.net
Sun Mar 8 23:56:08 MDT 2009

And as the rising dollar pulls more Western European money capital across
the Atlantic.

March 8, 2009
Op-Ed Contributor
Subprime Europe 

THE 1931 collapse of the Austrian bank Creditanstalt provoked financial
panic across Europe and almost single-handedly turned a bad downturn into
the Great Depression. Last week, when I read about the brewing European
banking crisis, I suddenly began to dread that history might be repeating

You might think that my worries are a bit late. After all, losses on
subprime mortgages in the United States have already caused a
Depression-like banking collapse. Well, believe it or not, Europe's current
crisis is scarier. For while losses on Eastern European debts may be only a
small fraction of those on subprime mortgages, the continent's problems are
politically harder to solve, and their consequences may prove to be much

Much as in our subprime mess, Eastern Europe's problems began with easy
credit. From 2004 to 2008 Eastern Europe had its own bubble, fueled by the
ready availability of international credit. In recent years countries like
Bulgaria and Latvia borrowed annually the equivalent of more than 20 percent
of their gross domestic product from abroad. By 2008, 13 countries that were
once part of the Soviet empire had accumulated a collective debt to foreign
banks or in foreign currencies of more than $1 trillion. Some of the money
went into investment, much of it into consumption or real estate. 

When the music stopped last year and banks retrenched, the flow of new
capital to Eastern Europe came to an abrupt halt, and then reversed
direction. This credit crunch hit the region just as its main export markets
in Western Europe were going into free fall. Moreover, with so much of the
debt denominated in foreign currencies, everyone in Eastern Europe has been
scrambling to get their hands on foreign exchange and local currencies have

Most of the Eastern European debt is held by Western European banks. It also
turned out that some of the biggest lenders to Eastern Europe were Austrian
and Italian banks - for example, loans by Austrian banks to Eastern European
countries are almost equivalent to 70 percent of Austria's G.D.P. Now, Italy
and Austria can't afford to bail out even their own banks.

The debt crisis in Eastern Europe is much more than an economic problem. The
wrenching decline in the standard of living caused by this crisis is
provoking social unrest. American subprime borrowers who have had their
houses foreclosed on are not - at least not yet - rioting in the streets.
Workers in Eastern Europe are. The roots of democracy in the region are not
deep and the specter of right-wing nationalism remains a threat. 

So what is to be done? The potential approaches essentially mirror those
that have been attempted in response to America's subprime problem.

The first approach is to deal with the short-run liquidity problem. In the
same way that the Federal Reserve expanded its own lending last year to
compensate for the collapse in private lending, the International Monetary
Fund is providing funds to Eastern Europe, and Hungary has proposed that the
European Central Bank lend to borrowers who use non-euro assets as
collateral. But given the state of the rest of the world, Eastern Europe
will not be able to export its way out of its troubles in the immediate

The debts of many Eastern European countries and some banks will have to be
written off. Ultimately, as in the case of the American subprime debts,
taxpayers will have to foot the bill. But which taxpayers? The taxpayers of
Austria and Italy certainly can't. So the burden will have to fall on the
rich countries of Europe, especially Germany and France. 

There are two approaches to taxpayer-financed bailouts. The first is to go
case by case. This is being proposed by the Germans. The problem here, as we
discovered after the Bear Stearns rescue last March, is that the
case-by-case approach does nothing to establish confidence in the system and
prevent contagion. 

The best choice would be a fund that provides bailout money and a protective
umbrella to banks and countries, even those that don't seem to need it now.
Hungary has proposed the creation of such a fund with roughly $240 billion
at its disposal. Though the proposal has already been rejected by stronger
European economies, the American experience of last year in which the
Treasury finally had to ask Congress for $700 billion for a similar fund
suggests that this is where Europe will end up. 

The response of the American government to the financial crisis has been
criticized for being too slow and inadequate. But at least we have a federal
budget, the national cohesion and the political machinery to get New Yorkers
and Midwesterners to pay for the mistakes of homeowners in California and
Florida, or to bail out a bank based in North Carolina. There is no such
mechanism in Europe. It is going to require leadership of the highest order
from officials in Germany and France to persuade their thrifty and prudent
taxpayers to bail out foolhardy Austrian banks or Hungarian homeowners. 

The Great Depression was largely caused by a failure of intellectual will.
In other words, the men in charge simply did not understand how the economy
worked. Now, it is the failure of political will that could lead to economic
cataclysm. Nowhere is this danger more real than in Europe. 

Liaquat Ahamed is the author of "Lords of Finance: The Bankers Who Broke the

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