Dangers Lurk as Economies Slow in 2008 ‘Part II’
Apr 15th, 2008 | By Eric Roseman | Category: International InvestingAs I said yesterday, I spent all last week touring Europe, and checking out the local investment scene. And as I traveled from Milan to Zurich, I found the same sort of dangers threatening the Eurozone that have plagued the U.S. economy since last summer.
Specifically, real estate and the German wage demand has been threatening Europe’s post 2003 boom. But frankly, it’s not just real estate or German wage demand threatening Europe’s post-2003 boom…it’s the high current account deficits.
Most of the European Union’s newest members over the last five years sport dangerously high current-account deficits. These are the same kind of economic imbalances that triggered the Asian Contagion in 1997.
Speculators specifically target countries that have vulnerable economic imbalances, once these countries’ respective trade balances turn decisively negative.
Iceland is the latest casualty this year with its economic imbalances. Hedge fund managers and other speculators are swooping in following a series of margin calls on Iceland’s banking system.
Iceland, by all intents and purposes, has literally been run like a hedge fund since 2002. Banks made huge bets on global stocks, venture capital and other investments with leverage. Now the credit crunch is coming home to roost. Iceland’s current-account deficit as a percentage of GDP is now a staggering 14.8%.
Other countries are in far worse shape than Iceland, but speculators have yet to attack because of their close relationship with the EU. Latvia and Bulgaria harbor wickedly high current-account deficits at 22.8% and 21.6% of GDP, respectively. Other danger spots are Estonia (15.9%), Romania (13.9%), and Lithuania (13.7%).
Italy, a bastion of some of the finest manufactured goods in the world, remains an economic basket case. The stock market has been among the worst performing bourses in Western Europe over the last three years.
Italian government bond yields remain excessively above those of comparable German bonds, indicating investors are worried about sovereign credit risk in 2008. Greece is also in this camp and has recently been joined by Spain and Portugal as yield-spreads or the difference between Eurozone government debt markets, continues to widen. That’s something that shouldn’t happen because all countries share the same currency.
For Europe, the main issues and challenges in 2008 are “bubbles” in several real estate markets; economic overheating and chronic trade deficits in Eastern Europe; rising wage pressure in Germany, and high producer and consumer prices.
All these issues will compel the European Central Bank to stand firm on monetary policy at a time when credit markets are still fragile.
ERIC ROSEMAN, Investment Director
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