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Latvia's economy is contracting 19% this year, and it has failed in a bond auction this week. Deposit interest rates have skyrocketed to 25%. From the WSJ:

In the first quarter, GDP slumped by 18.6%. Without devaluation, extraordinarily painful cuts would be needed. Perhaps the real issue now is not whether to devalue, but when and how.

With more than 85% of private sector loans in foreign hands, this means default.

The Latvian stress also soured sentiment on emerging markets, with the Hungarian forint and Polish zloty both remaining under selling pressure. At 0835 GMT, the euro was at HUF286.38 against the forint, little changed from levels late in New York Wednesday. The euro was also at PLN4.4975 against the zloty, slightly below the PLN4.5320 area from late New York hours.

All of Eastern Europe is now in a similar situation as Latvia. And the Western European banks are leveraged to a hilt on Eastern Europe. Eastern European defaults would take down the Western European banks.

Angela Merkel and the ECB are too busy lecturing the US about imaginary inflation to take care of their own backyard. They do not recognize the gravity of the situation that if EE goes down in a currency crisis, credit spreads will widen again and it will be just like the failure of Kreditanstalt in 1931. This opens the door to sovereign credit defaults.

Remember, during the mass defaults of the 1931-36 "contagion", almost every major country in the world defaulted, including the United States, by repegging the gold standard from $20.67 per ounce to $35 per ounce and making gold inconvertible.

What's needed is massive quantitative easing by the ECB with proceeds pumped into the troubled countries. Unfortunately that will not happen due to the ideological nature of the ECB, and therefore disaster is likely. Next are Ireland, Spain, the UK...

Originally posted to randomfacts on Fri Jun 05, 2009 at 04:42 AM PDT.

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Comment Preferences

  •  greetings from europe (2+ / 0-)
    Recommended by:
    dougymi, Nebraskablue

    when the  BOE says QE has not helped a bit.
    why should we all lose our savings because some greedy B****** may lose on their speculation .for havens sake dont get me wrong but east europe has some experience in going or beeing BROKE. the world will not stop to exist.but what about california or
    the us overall. do you really think that the fed buying their own products gives you growth (QE)
    it is insane to think more debt would get u out of debt.sorry
    ps no i dont remember 1931-36 and i am pretty sure you are also not old enough to REMEBER ;-)
    and a personal tip for better arguments ambrose evan pittard at the telegraph has a master degree in euro bashing i am sure you could learn a thing or two

  •  oh and allthough i share your (0+ / 0-)

    view on the UK
    they have nothing to do with ECB policy you know . on ireland there is a very telling article on bloomberg http://www.bloomberg.com/...

    •  You totally missed the point with the UK (0+ / 0-)

      The point about the UK is that the government has backstopped the banks.

      If the banks go under because of an Eastern European currency crisis, they will take the Pound down with them.

      They tortured people to get false confessions to fraudulently justify our invading Iraq.

      by sullivanst on Fri Jun 05, 2009 at 08:10:20 AM PDT

      [ Parent ]

  •  Deep economic thought of the day (4+ / 0-)

    The Latvian stress also soured sentiment on emerging markets, with the Hungarian forint and Polish zloty both remaining under selling pressure. At 0835 GMT, the euro was at HUF286.38 against the forint, little changed from levels late in New York Wednesday. The euro was also at PLN4.4975 against the zloty, slightly below the PLN4.5320 area from late New York hours.

    Well, if your unit of currency is called the "stress," of course you're going to have periodic currency crises.

    Al que no le guste el caldo, le dan dos tazas.

    by Rich in PA on Fri Jun 05, 2009 at 06:05:20 AM PDT

  •  Eastern Europe (2+ / 0-)
    Recommended by:
    dougymi, gerald 1969

    Sorry but if the Eastern Europeans had not been such fans of St. Ronald Reagan and of his brand of economics they would not be in this mess.  All of these economic "tigers," whether Celtic or Baltic, leave one absolutely cold.

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