Just Hang on - Berlin's Billions Will Save You
Byline: William REES-MOGG
n the history of the Great Depression of the Thirties, one particular banking insolvency stands out, as did the insolvency of Lehman Brothers in the crisis of 2008. On May 11, 1931, the Austrian Kreditanstalt bank suspended business.
The losses were not large, even in the money of that time. They came to only $20 million. But the bank had become a key factor in European policy, and had a Rothschild as its president.
Before 1914, the Kreditanstalt had been the lead bank of the Austro-Hungarian empire. The suspension of the bank distorted the structure of German and central European finance. Among other consequences, it destroyed the German government's proposal for an Austro-German customs union.
As in 2008, the economic crisis of the early Thirties started in the United States and spread first to Britain and then across Europe.
The present crisis puts the weakest European economies under the greatest pressure. The plague spreads from the strong to the weak.
Once again, the weaker European countries are passing the pressure on to Austria, and Austria is putting pressure on Germany.
Foreign banks have lent more than [pounds sterling]580 billion ($800 billion) to Poland, the Czech Republic, Hungary, Romania and Ukraine.
The two banks with the largest exposure, in terms of their own assets, are both Austrian, the third is German.
According to the Royal Bank of Scotland, total loans to Eastern Europe now come to [pounds sterling]1,200billion ($1,656billion), with Austrian exposure equivalent to 75 per cent of Gross Domestic Product (GDP). That is too high.
These figures do not include Russian borrowing because Russia is not so dependent on commercial banks.
Russia's weakness has been the fall in the oil price - the whole economy depends on oil.
The Eastern European countries have to extend the loan period of a significant proportion of their borrowing - probably about [pounds sterling]290 billion ($400 billion).
Yet these economies are already weakened by the world depression.
According to an expert commentator, Ambrose Evans-Pritchard, Ukraine has suffered from a drop of 34 per cent in industrial production, with a 20 per cent drop in the whole economy between January 2008 and 2009.
Ukraine does not have the largest debt, but is obviously under great financial pressure. krainian Prime Minister Yulia Tymoshenko made a public statement saying that there is no danger of default. She said: 'The state is paying all its credits.' Unfortunately, it can be an alarm signal when a prime minister finds it necessary to assure the world that their country is still solvent.
The Ukrainian government has also suffered the resignation of the Finance Minister, Viktor Pynzenyk, who said he was no longer willing to act as a political pawn. Ukraine's relations with Russia remain difficult, and are a further reason why bankers might feel nervous. …