The next global economic shock?
Western Europe's banks are too indebted to export-hit Asia and Eastern Europe.
As American financial strains have at last begun to show some signs of healing, another risk from the European side of the ocean has become more evident. For some time now, America's friends and associates on the other side of the Atlantic have, as is their habit, enjoyed blaming all problems on America's risky ways.Skip to next paragraph
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But of late, it has become clear that Europe's own financial wizards have opened their financial institutions to a potentially bigger problem: Eastern European and Asian debt. The losses could even surpass those of the subprime meltdown. Though at present the potential problems deserve the tag "risk" and not "probability," investors need to remain alert to the situation.
The problem for much of the emerging world is that the global economic downturn has severely hurt exports, their main – and in some cases, only – engine of economic growth.
Take China. Its exports have fallen by about 17 percent, as have Singapore's. Others have fared a lot worse. South Korea's exports have plunged by 21 percent, and Taiwan's by 36 percent. Similar figures typify the situations elsewhere in Asia and in Eastern Europe.
Not surprisingly, given the export-oriented growth model of these economies, overall economic growth has also turned sharply downward. Singapore's gross domestic product (GDP) declined 11.5 percent from a year ago, while South Korea's economic output sunk 4.2 percent.
In the Ukraine, December industrial production registered a 26.6 percent decline from a year ago. Other nations, from the Czech Republic to Hungary to Russia, have experienced sharp contractions, too.
The problem for Western European finance is that it holds most of the international loans in these sinking economies. European banks, for instance, hold some 54 percent of the $1.4 trillion of foreign bank loans residing in the Asian emerging economies. (For perspective, American banks hold only 15 percent of such debt.) Of the $1.8 trillion of foreign bank loans in Eastern Europe, more than 70 percent resides in Western European banks.