Europe in Crisis!

Europe was initially believed to be a safe haven from the US financial crisis, which led to a rush into the Euro. However, this safe haven has proven to be full of sharks, which led to to an exodus from the Euro once investors realized that Europe may in fact, be in more danger than the US.

Some key points regarding European Countries:

  • Many European countries suffered an even larger housing bubble than the US in recent years however unbelievable that seems.
  • European banks hold around 75 cents of subprime mortgages for every $1 of subprime mortgages US banks hold. That’s a ton of crap!
  • The European Central Bank is accountable to over a dozen countries with often in conflict. Although the rescue efforts by the Federal Reserve are controversial, they are nonetheless concerted and unified. Europe, however, is not a united entity and this makes dealing with the crisis much more difficult.

Now to highlight the Countries currently in focus:

1. Iceland: This country has been known to be run like a hedge fund. Recently it has leveraged itself into bankruptcy. Perhaps this island will return to being famous for geysers and not being an international banker.

2. UK: UK is suffering from the aftermath of a housing bubble bust. According to some sources, the banking sector is equivalent to 350% of the UK GDP. UK has recently declared intentions to experiment quantitative easing, which is, in short, printing massive amounts of money. The Japanese tried it, with questionable results.

3. Spain: This was another country that went on a real estate boom and is now coming back to earth. 70% of bank savings portfolios were in real estate and the bubble is now deflating…

4. Greece: Greece is one of the most backward states in the EU. According to some estimates, if Greek’s current policies do not change, its national debt to GDP will be 500% by 2050. Greek banks also have large amount of assets in the Balkans, where prosperity has now turned into crisis.

5. Switzerland: The money gnomes of Zurich appear to have grown old. UBS has over $60 billion related to subprime losses and is now being forced to end its lucrative secret account services for tax evaders. Assets under wealth management are also seeing outflows. At about $2 trillion, the balance sheet of UBS is four times as large as Switzerland’s gross domestic product. If the banking sector loses strength, Switzerland may face a heavy blow.

6. Baltics/Balkans: The boom in these areas have largely been fueled by credit from foreign banks (Scandinavian for Baltics and Austrian/Italian/Greek for Balkans.) As long as money kept rolling in, the cycle was virtuous. But now the credit crunch has led to an abrupt stop to the prosperity. A bust erodes asset values which decrease the will of banks to lend to these regions which further depress collateral value. Many economies in these countries were overheated, like Latvia having double digit inflation.

Europe is in deep crisis and most importantly, it also has an aging population. Adverse demographics may prolong the problem. If there are fewer young couples to buy new homes, how will housing prices rise?

We hope this article sheds some light on some of the crises Europe currently faces. In short, Europe is hardly the safe haven people thought it was. Investor caveat!

This was a guest post by StockTradingToGo Community member Allen. Other recent posts from this author:

View more posts by Allen

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  1. johnson says

    Duh. Many of the countries in this article are not EU or euro zone and hence do not incur the one central bank, many countries problem that you refer to. Iceland is not an EU member, nor euro country. The UK has its own currency and central bank. Switzlerand is neither an EU member nor euro country. The Baltics are tiny, and non-euro, as are most of the Balkans (except Slovenia).
    While western Europe’s banking sector total exposure to Eastern Europe is often cited at around 1.7 tn, the size of the net problem is much smaller. Private estimates that I have seen range from 50bn to 200bn. No small change but not enough to bring it all down.
    While these countries borrowed much too much in foreign currencies (same old emerging markets problem), they are mostly relatively lightly indebted to start with ie. total private sector debt:gdp is 25%-75%, versus some multiple of that for developed countries in europe and elsewhere.
    There have been and will be further problems, but the size is being extrapolated by various dramatic headline makers.

  2. Allen says

    I agree that the problems will not be systemic, and things will not be “brought all down”. But many segments of Europe are probably worse off than the US and the European economy or Euro is probably not much better off than the US or USD.
    This would’ve been a more fitting post half a year or maybe a year ago, but I saw that related content was not on the site so I thought I’d add it.
    Thanks for your feedback.