The Creeping Eurozone Credit Crunch
By Global Macro Monitor
Here’s a very informative chart via Morgan Stanley showing the deterioration in the Eurozone’s key credit indicators. Banks will no doubt sell assets, at least in part, as a way to meet their required capital targets.
During the 1997 Asian financial crisis, Japanese banks, getting killed with a falling Nikkei and their credit extended to Thailand and Indonesia, found that rolling off interbank lines to Korea the easiest way to shrink their balance sheets. American and European banks, not wanting to be the last out of Korea, panicked and followed the Japanese banks thus sucking in another country into the Asian crisis.
The Korean banks having to raise dollar liquidity sold their Brazilian and other emerging market bonds. Brazilian banks long their sovereign’s bonds that were declining in price had to raise liquidity and sold their Russian assets. The global margin call was on and fueled a full blown contagion and ended with the Russian debt default and LTCM crisis. Let’ hope it doesn’t come to this. Stay tuned and stay vigilant.
This has clearly been happening in Europe for the last three years. Banks are slowly reducing their exposure to other nations. They are not lending anywhere and are trying to rebuild capital. As a result I suspect that we could see more to come as losses are becoming more certain on sovereign loans.