The European Unemployment Map

Yesterday I compared Italy and Spain, and noted that when it comes to unemployment the worst regions in Italy have roughly the same unemployment rate as the best regions in Spain. This led me on to making this map (using data from Eurostat) to show unemployment rates for all EU and EES regions

The map gives some hints about where there might be problems - the unemployed who have debts have more difficulties keeping up with their loan payments - the unemployed don't pay very much in taxes and thus don't contribute to the government coffers - the unemployed are rather more prone to engage in activities such as social unrest.

The biggest problem is obviously in Spain, which stands out like a sore thumb! Greece has nearly the same level of unemployment, but Spain is much larger. Add to this the fact that the Spaniards are up to their ears in debt after the popping of their monumental real estate bubble...

It's also interesting to see how unemployment often does not follow national borders. Northern Italy, for example, seems to have more in common with the German-speaking area of Europe than with southern Italy. Sometimes, however, the national borders make a big difference, e.g. between Spain and Portugal.

Also note that France looks a lot more like the central part of Italy than it looks like Germany when it comes to unemployment. Bienvenue au club PIIGSF, monsieur Hollande!

The difference in Germany between former East Germany and West Germany is still clearly visible, as the east still hasn't caught up with the west.

Another striking difference is that between Czechia and Slovakia, where Czechia looks like Germany, but Slovakia (except the Bratislava region) has a high unemployment rate that increases towards the east.

This is a translation of a post from my Swedish blog.

Western European Banks' Exposure to Eastern Europe

This article is a translation of an article on my Swedish language blog.

Last week I wrote about Eastern Europe's loans from Western European Banks (in Swedish). Now I've taken the latest figures from BIS and made graphs to illustrate how the situation is. Please note that the figures are only for claims from banks. There may be other lenders too, but it's not as easy to find statistics for them.

First I'll present an illustration of which Eastern European countries have borrowed most. The colours indicate which in Western European countries the they have borrowed from belong. Click the graph for a sharper version.This graph shows clearly that we don't need to worry too much about Western Europe's banks if Macedonia, Moldova, Montenegro, Belarus, Albania, Bosnia or Serbia should be hit by a collapse of the economy and currency, since their loan volumes are relatively small. The other countries, however, are potential threats to Western Europe's banks. This becomes especially clear when one Western European country has a large proportion of the lending to a certain Eastern European country, e.g. Sweden to Estonia, Latvia and Lithuania.

Huge figures have been floating around when it comes to the exposure of Western European banks to Eastern Europe, but the total sum of bank lending is "only" slightly more than 1.4 trillion dollars, which should be quite close to the actual figure. This is still, however, a very large figure.

Now I'm going to look at it from "the other side", i.e. divided per lender country instead.Here you can see that Austria is at the top of the risk list for lending to Eastern Europe. As for Sweden we can note that the major part of the lending is to the three Baltic states. Since these three economies risk following each other, Sweden is much more exposed to a single risk factor.

However, absolute numbers don't often say that much. If Italy lends a bit over 200 billion dollars that's a larger share of the country's GDP than if Germany lends the same amount. So below I compare the banks' lending to Eastern Europe to the GDP of the countries (taken from the 2008 GDP estimates from the CIA Factbook).Then you suddenly see what a huge risk Austria is taking! Their banks have lent roughly 64% of the country's GDP just to Eastern Europe! Even a mild crisis in Eastern Europe would thus probably suffice to topple Austria's banks - we don't even need a serious crisis. The biggest Austrian claims are on Czechia, Romania and Hungary. At least Romania and Hungary are already on the problem radar...

By Austrian measures the other Western European countries have taken limited risks towards Eastern Europe, even if they definitely aren't negligible. Belgium's banks have lent about 25% of Belgium's GDP to Eastern Europe, and Swedish banks about 20% of our GDP, most of it to Estonia, Latvia and Lithuania.

Let us also take a look at which Eastern European countries have borrowed the most in relation to their GDP, and thus have taken a large risk. This is according to my usual identification mechanism for potential problems in this crisis. Large loans = large problem risk.Here you can see that Croatia and Estonia are in a risk class of their own. Their claims from foreign banks are more than 120% of their GDP. But Latvia, Hungary, Czechia, Slovakia, Lithuania and Bulgaria are also risk factors that cannot be ignored (the nominal sum of their borrowing according to the first graph in this article also plays a part here). Add to this the fact that GDP for many Eastern European countries is now falling rapidly, and we will quickly get even bigger loans-to-gdp ratios.

Part of the risk is also the currency risk. A large part of the loans from Western to Eastern Europe are denominated in euros or Swiss francs. This causes payment difficulties when the local currency sinks against the euro and/or the franc. Unfortunately I don't have any figures for how much of the loans are denominated in foreign currencies, but we can take a look at how some currencies have moved against the euro since the end of August last year.Here you can see that Ukraine's hryvnia and Poland's zloty have fared worst. We have all heard about Ukraine's problems, but there has not been much mention of Poland during this crisis. Hungary, Romania, Russia and Czechia have also been hit by falling currencies, though not as badly.

To conclude, we can see that the banks of several Western European countries have taken large risks towards the now faltering economies of Eastern Europe. There is an immediate risk that for example a currncy and/or economic collapse in one of the risk countries I've presented above could topple e.g. Austria's banks. This in turn would probably give serious repercussions for the whole euro area (Austria is part of it). As I see it it is only a matter of time before something drastic happens. Exactly what will happen is hard to predict, but Sweden is definitely also in the risk zone.

In this context it is interesting to note that the bank crisis of 1931 had its origins in Austria, where their then largest bank Creditanstalt went bankrupt in May of that year. Will we get a replay?

P.S. I recommend the following two articles by Ambrose Evans-Pritchard at the Telegraph for those who want to read more about the risks from Eastern Europe:
Failure to save East Europe will lead to worldwide meltdown
Eastern European currencies crumble as fears of debt crisis grow

And Europe?

It seems that U.S. financial institutions have managed to export some of their worst tranches of subprime loans to Europe. This can be seen from the size of the interventions by the central banks. On Thursday last week the European Central Bank had to inject €95 billion in liquidity into the markets (about $130 billion), whereas the U.S. FED only had to inject $24 billion. We still don't know the whole map of who sits on what bad credit, but it will be revealed eventually.

It is now obvious that the subprime mortgage mess is not "contained" in any way, and is definitely not contained within the country of origin, the U.S.A.

There has been a lot of news lately about U.S. housing and mortgages, but I expect all this to turn up in Europe too. Housing prices have been rising like a bubble here too, and many people are up to their ears in mortgages, and have no margins in their economy. Inspired by Robert Shiller's graph of inflation-adjusted U.S. home prices, I compiled one for home prices in Sweden. Unfortunately I could not easily find data before 1975, but here it is:
I've taken the FPI (Fastighetsprisindex småhus) divided by KPI (Consumer Price Index) and multiplied it by 1000 just to get some nice round numbers (figures from SCB). You can see that the prices have gone up and down in waves more or less like the U.S. prices from 1975 to 2000. Then, just like in the U.S. since 2000 they have risen above any previous tops, though the bubble is not as big as in the U.S. The situation is similar in most other western European countries - worse in some (notably UK and Spain), maybe better in others.

Now that lending standards have suddenly tightened up, I expect housing prices to fall in Europe too, and soon we will have our own version of the subprime mess. All major Swedish banks have said last week that their exposure to U.S. subprime mortgages is minimal, which I believe. What they do not mention is their exposure to the Swedish mortage market, which could quickly turn sour.

We definitely haven't seen the last fallout from the global tightening of credit. There are lots of pockets of bad credit all around the globe and in all kinds of markets, just waiting to pop up.