Tuesday, December 15, 2009

Countries to Watch

In talking about Dubai on the last radio show, I briefly mentioned a few other countries.  I also questioned whether the strong US dollar last week was, rather than a possible bottoming as other analyst have speculated, was the result of seeking a safe haven from sovereign default.  This week with the welcome but inadequate $10 billion from Abu Dhabi to Dubai, the market "sighed relief " and the US dollar reverted to being weaker.  Was I right?

Moody's Misery Index listed countries with public debt in relation to sovereign default risk in descending order or risk: Spain, Latvia, Lithuania, Ireland, Greece, United Kingdom, Iceland, United States, Jamaica, France, Estonia, Portugal, Hungary, Germany, Italy, and the Czech Republic.  Take note of number 6 and number 8 on the list.

The 6th largest Austrian Bank, Hypo Group Alpe Adria, was was nationalized by the Austrian government as insolvent with 40 billion Euros in assets at the insistence of the ECB's chairman Trichet.  The  bank is a subsidiary of the German bank, Bavaria BayernLB, which had reported losses of over 1 billion Euros for the second quarter in a row from HGAA.  Austrian banks have been the subject of how much exposure they have to lending in weak Eastern European countries and some analysts consider German banks fragile as the result of reckless lending seeking high returns.  Credit Writedowns has an excellent article on the nationalization of HGPP and its relation to what is going on in Austria, Germany, Eastern Europe, and Dubai.  Sweden and Poland also have large exposure to Eastern Europe.

CMA DataVision has issued a Q4 report on the Global of countries by percentage of risk for sovereign default based on CDS prices.  It is a multi-page report but here is page 13 with a listing of countries by percentage probability of default.  The top ten are Venezuela, Ukraine, Argentina, Latvia, Iceland, Dubai, Lithuania, Romania, Lebanon, and Greece.  It should be noted that Greece has started to take serious action to curtail spending and has about a year to get its debt and budget under control.  It will be interesting to see if the public demonstrations by young people in Greece will moderate or increase.  Spain has serious economic contraction and, while the economy appears to be picking up in Italy, there have been reports of right wing reactions, particularly against immigrants.

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