Run for Your Investment Life!

Posted February 17, 2009

New worries emerge that Western European banks financial conditions are worsening leading to a decline in the euro. Investors are fleeing to the US dollar and yen seeking safe haven from a volatile currency exchange market.


Fire! Fire! Run for your investment life!  That might as well be the financial market mantra as worried investors respond to waves of bad economic news around the world. The newest concern is a fear the Western European countries that have loaned to the Eastern European countries will see debt defaults. 

Just as a point of discussion, there are varying definitions of what countries constitute Western and Eastern Europe.  For this article the Western European countries include countries like the United Kingdom, Germany, Italy, Sweden, Austria, France, Belgium, and Switzerland.  The Eastern European countries are the Baltic countries, Russia, the Ukraine, Hungary, Poland, and so on. 

Among the Western European countries, Austria is considered by some to have the worst exposure related to foreign loans.

In a nutshell, countries like Sweden have loaned massive amounts of money to countries like Latvia.  With the deepening recession, there is growing concern the borrowing countries will be unable to repay the debt.  There is even speculation some countries may come to the point where they are unable to defend their currency any longer.  It could spell the collapse of an entire economic and political system such as that already seen in Iceland.

For example, Poland and Hungary are struggling right now to defend their currencies against further weakening.  The Poland zloty weakened to 4.9307 per euro or 1.8% and the Hungary forint has fallen to 309.68 per euro which represents a 1.7% decline.

As a result of the banking system worries, the euro has declined below $1.26 for the first time since December.  Early this morning in New York, the euro had fallen to $1.2589 against the US dollar.  It also weakened against the yen to 115.75 yen per euro. 

In another part of the world, Venezuela currency, the bolivar, has strengthened against the US dollar to 5.65 bolivars per dollar.  Venezuela voters eliminated term limits yesterday which means Hugo Chavez can pursue another term as president beginning in the year 2013.  There is speculation he will now be taking measures to devalue the exchange rate while increasing Venezuala oil revenues through price increases and tax measures.

Canada’s currency weakened against the US dollar to $.7925 US cents per Canadian dollar.  The weakening is mostly due the flight of investors into safe haven assets such as the US dollar and the yen. 

In addition, the fears over the banking problems in Eastern Europe are creating a sense of doom and gloom in all the currency markets.  Canada’s dollar value is commodity price linked and commodities right now are considered risky as investments.  The price of a barrel of crude oil has fallen to $35 cutting revenues of countries like Canada that rely on oil exports as a significant component of their GDP.

The financial markets remain volatile with funds shifting rapidly between equity and currency markets.  But the growing concern over the conditions of the world’s banking system is something that should be taken very seriously.  The bank balance sheets are loaded with foreign debt and toxic assets already.  As unemployment continues to rise, the banks are also dealing with a rise in bad consumer and commercial loans on top of everything else.

The governments around the world are still busy printing money as one country after another considers adopting a policy of quantitative easing.  Japan is the most recent country to consider the move. 

Too much currency in the market coupled with too much bad debt equates to….what?  Unfortunately Western and Eastern Europe are about to be the first to find an answer to this question.