Monday, 22 December 2008

Baltics Exposure, A Recap ...



"The euro zone’s exposure to the deterioration in economic conditions in Eastern Europe is not restricted to the real economy.

Euro zone’s banks total an exposure of USD 1,300 billion to Eastern Europe according to BIS data, while that of Swedish banks amounts to USD 104 bn, i.e. far higher figures than for American banks (less than USD 63 bn).

European banks hold USD 3,600 billion in debts on emerging countries, i.e. 14% of their total foreign debts, including 35% on emerging Europe, Turkey and Russia. Notwithstanding, there are significant differences between countries.

Austrian banks are the most noticeably exposed, as Eastern Europe accounts for 48% of their foreign debts (70% of GDP), followed by Italian banks (16.5%) and their Swedish counterparts (13.4%) because of their significant exposure to Baltic countries.

The respective commitments of French and German banks are far smaller, i.e. 4.1% and 4.5%, respectively, of their external assets. The substantial exposure of Spanish banks to emerging countries is accounted for by their commitments in Latin America (24.6% of their foreign debts).

All in all, the euro zone is exposed to the deterioration in Eastern European economies via two channels: on the one hand, the reversal of the cycle and, on the other hand, the huge size of debts held by some banking systems on this region."

So 2009 will see the first test of the Nordic banking sector since 1993. We certainly see if the foundations are sound and risks well managed.

2009 will be an interesting year. It will tell us , sometime in the second quarter, if the measures taken globally (interest rates cut, income tax cuts, bail out, etc..) are working.

All in all we will either see a stabilization then anemic growth , if interventions were successful.
If such stabilization doesn't occur and further unknown shock appear, then the deterioration risks will increase substantially and the impact will throw economies and countries into uncharted territories.

Let's hope that the stabilizer will work, which is highly probable due the extent of government intervention. Although, I will recommend a "wait and see" approach if you are planning to do big investment as the timing is risky unless you follow the "Warren Buffet" approach ...

11 comments:

Rui said...

2009 rent will increase a lot. My friend lives in partially ownership house, has just received notice, 10% increase in rent since next year.

In case of recession, rent will goes higher, housing price will go down.

Today's economy situation changes so fast, no one know what will happen in next year, maybe after summer recover starts?

HousingFinland said...

you are out of subject...anyway I have talked about rent last february in this article :http://housingfinland.blogspot.com/2008/02/rents-breaking-myth.html

One question: Do you believe that you can blow air in a balloon indefinitely (putting finite boundaries around an infinite phenomenon)?

If so, you must be an academic - one that is disconnected from reality such as all the trained economist - trained to see the same thing at the same time- The result massive boom and bust where common people bear the brunt.

HousingFinland said...

http://www.yle.fi/uutiset/news/2008/12
/rental_flat_construction_boom_445086.html

Here is a document published today that tells that renting price cannot stay high for very long.

As Usual, the market force are in action and allows to find an equilibrium very quickly to a situation that is abnormal (high rent price during a recession with rising unemployement).

The only thing that could sustain high rent price would be, government intervention (not to say self-interest motivation), in order to limit delivering permit for building construction ( which they won't as it could create jobs)

Rui said...

Custruction company want not only permission, but government sponsor also. I doubt government will give them any money.

This is basically the way how government has helped construction company during last crisis. But this time, it has already made clear, government will not sponsor construction company. It was told in news few month before.

Andrew said...

Super K said he would not help the construction companies until the prices of Government tender prices begins to fall.

Elsewhere it has been indicated that bridge repairs and road repairs will get extra funding.

You can imagine that construction will get money as soon as the economy begins to really noticably get worse.

I am hoping for a cut in house buying tax. That is quite an amount of money the government takes to prevent a house sale or take advantage of those making money from buying and selling. It is no longer necessary to prevent house sales or exstract money from buyers of houses.

Rui said...

The main reason I think housing price will not fall too much are,

1) housing bubble is not really bad in Finland, compare with other places, it can be hardly called a bubble.

2) People move to Helinki region for job, this trend will continue, I think eventually great Helsinki area might end up 50% of whole Finland population.

3) Finnish people lives very small area, average people/squares among the smallest in EU.

4) Large amount of old apartment need expensive repare, an old flat need total pipe, wall, roof, windows, electitic repares. The whole repare cost is not much less than build new one.

5) High rents, even government housing is not that cheap, compare with current buying cost (if you consider long term interest rates will containly be under 3%)

HousingFinland said...

Rui, Your logic doesn't hold.

Construction cost i.e labor cost, material price, will plummet from now onward. Almost all big projects are ending (commercial real estate etc..).

So cost will go down, sharply down: I think this could be divided by two or three easily.

This will have a direct impact on new housing.

The quality will increase too. That reminded of the Tech bubble, where you had journalist, pizza maker and co that suddenly become IT gurus...We know that project or application during those time were delivered with very bad qualities and most didn't survive time.

Now you will have real and talented constructors and workers that will be available to do new construction work. Qualities will rise at lower costs.

Housing bubble, in Finland compared to other country, is I think worse than the data is showing for many structural reason. Demography is an issue, demand will fall considerably in the next 2 decades or so. Obviously it depends on the main immigrant that Finland know as today, namely Russia and Estonia which represent about 80% if not more of the immigrant population. Should Russia economy fall into depression than, maybe you will get a massive inflow of Russian immigrant that could affect price on the east. Although there are not the wealthiest. The wealthiest will go to the UK, US or France, countries that will lead the recovery and become powers in the century to come.

High rent is fallacy - public led housing is going to take over private housing. As in the 70's , 90's, you will see lots of public building that will come in the pipeline. Obviously this public led effort will allow to swallow rising unemployment in the construction sector and will be funded by tax payer money - that's the unfair game, government is not Robin Wood.

HousingFinland said...

Hi Andrew,

I think they should cut tax for first time buyers and rise tax for land gamblers (including municipalities).

They will build road as long as needed to absorb future rising unemployed construction workers and related service jobs.

How about building a tunnel from Finland to Estonia? or a bridge that links earth to the moon, I think we could then start to see new settlers ;->

Andrew said...

Housing Finland did you see that the Prime minister is talking about raising taxes to pay for training and unemployment benefits?

Rui

You are a bit naive. When people live in old buildings which need expensive repairs there are no magic solutions that mean they must live in modern buildings with all of the luxuries that maybe you now take for granted.

When my mother in law was a child her family rented one room in a small building in Finland with an outside toilet and the owner lived the other side of a fabric/curtained 'wall'. He would stand there as Landlord in the same room washing himself with his body exposed to the children who rented the same space from him.

As a three year old child my mother in law was in an orphanage in Sweden separated from her mother in Finland and father fighting the russians at the front. Her sister was also in Sweden but in a different location. This all happened very recently in historic terms.

Finland has done amazingly well to create a rich economy from the ruins of war but it depends upon trade to maintain that wealth.

No trade means no wealth and no repairs. It means decay and endless years of hardship.

It is said that Finland does not have high debt levels compared to the rest of the world. But what does that mean? Does it mean that finland has low debt levels?

Here in New Zealand nobody i know or I have met has any debt. We all seem quite well off. But even so this country has the highest private debt levels of any modern country apart from Iceland. Therefore those who have debt must be massively indebted. And this must be also true in Finland where even the office of statistics or was it the bank of finland said aloud how shocked he was at the high debt levels of some Finns.

When those people become poor they drag *all* people down. When they exit the house buying 'thing' who will take their place?

Where will the money come from now??

Where is the trade going to come from now?

Is the current trade collapse a temporary event or is an ongoing disaster never before seen by anybody alive today?

The whole population of Finland is *not* going to end up in the helsinki region if there is *no* work for them. Instead they will be in simple homes near forests which they can burn down to keep warm. When the forests are gone they will attempt to move somewhere else.

Do you know the future? It seems nobody else does.

When my grandmother was born there were 5 times fewer people on this earth than there are today. What will happen in the future?. Will we continue to grow or expand or will we go back to the same population of my grandmothers generation?

When my grandmother was alive Helsinki was very similar to what it is today. Will Helsinki become so different or will it remain similar?

Nobody knows the answers to these kinds of questions. But we will find out in the next few months if trade continues or is majorly different. By March we will know.

But now we know almost nothing.

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