Europe on brink of currency crisis meltdown

From the Telegraph (UK)

“This is the biggest currency crisis the world has ever seen,” said Neil Mellor, a strategist at Bank of New York Mellon.

The latest data from the Bank for International Settlements shows that Western European banks hold almost all the exposure to the emerging market bubble, now busting with spectacular effect.

As the economies of emerging nations in Europe and Asia crater, money is galloping back to the dollar (and yen.) This is further destabilizing those countries – and any financial institutions with big investments in them, either directly or via the now-dreaded credit default swaps. It’s European, not US, banks that have huge exposure in emerging markets. How insane did it get?

A few dare-devil homeowners in Hungary and Latvia took out mortgages in Japanese yen. They have just suffered a 40pc rise in their debt since July. Nobody warned them what happens when the Japanese carry trade goes into brutal reverse, as it does when the cycle turns.

The carry trade is the borrowing on money in one currency at a low interest rate and investing it at a higher rate in something denominated in another currency. This can be disastrous, as is happening now, when currencies collapse relative to the yen and dollar.

Yet again, central banks will be forced to intervene, this time in an attempt to prop up sick currencies. Hungary and Russia are among those most at risk.

But anyone can be affected.

The threat to Britain lies in emerging Asia, where banks have lent $329bn, almost as much as the Americans and Japanese combined. Whether you realise it or not, your pension fund is sunk in Vietnamese bonds and loans to Indian steel magnates. Didn’t they tell you?