Short DAX at 7740

Domino theory, Eastern Europe edition

From today’s FT:

Ukraine’s name, by some accounts, means “at the edge” - which is where its economy finds itself today. Austria’s finance minister warned last week of the risk of an economic “catastrophe” in the 46m-strong country triggering a “domino effect” of problems further west.

Indeed, Austria should be worried. The country’s exposure to Ukraine, and other Eastern European nations, is impressive.

To wit, this chart, which we reprise from Zero Hedge, showing Western European countries’ exposure to their Eastern European counterparts (and yes, you can debate whether the Czech Republic or Kazakhstan for that matter qualify in the ‘Eastern European’ category, but bear with us here).

4671.jpg


Hence we see rumblings like the one below, from Austrian finance minister Josef Pröll:

“Ukraine is a very important keystone country and we must avoid a domino effect inside the EU, if there is economic and political catastrophe in such a huge neighbouring country,” he told the Financial Times. “We don’t see this scenario developing now. But we must prepare and keep an eye on Ukraine.”

Fitch has already downgraded Ukraine’’s national long-term rating one notch to ‘AA’ on Friday. Bloomberg reports this morning that S&P is considering cutting the country’s sovereign rating too. Meanwhile there’s no news on getting the second tranche of a $16.4bn IMF loan, which appears in jeopardy as ministers struggle to meet the required terms and conditions, and spreads on the nation’s credit default swaps have blown out to over 3,000bp.
 
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from J. Mauldin

European Bank Losses Dwarf Those in the US

In a few paragraphs I am going to put up a chart from Nouriel Roubini's RGE Monitor on the size of US bank losses, and in a few pages I'll comment on the Geithner "plan" for rescuing US banks. We have indeed dug ourselves a very deep hole here in the US.

But European banks may be in far worse shape. Bruno Waterfield of the London Daily Telegraph reports to have seen an eyes-only document prepared by the European Commission for the finance ministers of the various EU member countries. The problem revealed in the report is an estimated write-down by European banks in the range of 16 trillion pounds, or about $25 trillion dollars! The concern is that bailing out the various national banks for such an unbelievable amount would push the cost of government borrowing to much higher levels than we see today.

As my kids would say, "Really, Dad, you think so?" Europe is somewhat larger than the US, so think what my gold-bug friends would say if the US decided to borrow $25 trillion to bail out US banks. The dollar would be crucified! The euro is going to get a lot weaker if bank problems are even half of what the report says they are. The British pound sterling is already off almost 30% and, depending on what the real damage is to their banking system, it could get worse.

Waterfield reports, "National leaders and EU officials share fears that a second bank bail-out in Europe will raise government borrowing at a time when investors -- particularly those who lend money to European governments -- have growing doubts over the ability of countries such as Spain, Greece, Portugal, Ireland, Italy and Britain to pay it back.

"The Commission figure is significant because of the role EU officials will play in devising rules to evaluate 'toxic' bank assets later this month. New moves to bail out banks will be discussed at an emergency EU summit at the end of February. The EU is deeply worried at widening spreads on bonds sold by different European countries."

Part of the problem is that European banks were far more highly leveraged than US banks. Some banks were reportedly leveraged 50:1. And they lent money to Eastern European projects and businesses which are now facing severe financial strain and plummeting local currencies.

Let that number rattle around in your head for a moment: $25 trillion. Even $5 trillion would be daunting. But the problem is that Europe does not have a central bank that can step in and selectively save banks from one country without taking on all euro zone member-country banks. Yet, as noted above, some countries may not have the wherewithal to save their own banks. It is reported that some Austrian banks are hoping that Germany will step in and help them. Given Germany's problems, they may have a long wait.
 
Russian industrial production slumped more than economists expected in January as demand eroded for cars, trucks and construction materials.

Output shrank 16 percent after falling 10.3 percent in December, the Moscow-based Federal Statistics Service said today. That was the biggest contraction since the service moved to a new methodology in 2003. The median estimate in a Bloomberg survey of 12 economists was for a 12 percent decline. In the month, production dropped 19.9 percent.
 
Daimler AG, the world’s second- biggest maker of luxury cars, said shrinking car markets will pose “substantial burdens” on earnings this year and will cause sales at its Mercedes-Benz Cars division to drop.

Daimler fell as much as 7.4 percent in Frankfurt trading after the Stuttgart, Germany-based company reported a fourth- quarter net loss of 1.53 billion euros ($1.93 billion), or 1.61 euros a share, compared with net income of 1.7 billion euros, or 1.70 euros, a year earlier. The loss was wider than analysts’ 227 million-euro median loss estimate.

Hum..."substantial burden"...is it really a "surprise" ?
 
Quote from ASusilovic:

Daimler AG, the world’s second- biggest maker of luxury cars, said shrinking car markets will pose “substantial burdens” on earnings this year and will cause sales at its Mercedes-Benz Cars division to drop.

Daimler fell as much as 7.4 percent in Frankfurt trading after the Stuttgart, Germany-based company reported a fourth- quarter net loss of 1.53 billion euros ($1.93 billion), or 1.61 euros a share, compared with net income of 1.7 billion euros, or 1.70 euros, a year earlier. The loss was wider than analysts’ 227 million-euro median loss estimate.

Hum..."substantial burden"...is it really a "surprise" ?
More...

Bloomberg headline :
Daimler Reports Unexpectedly Large Loss, Predicts `Burden' on 2009 Profit :D :D :D
 
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