7 Euro Zone Countries That Could Spark the Next Financial Crisis
The latest Euro zone nation to undergo a financial crisis, Cyprus, has raised questions about offshore banking and money laundering, particularly that of the Russian variety. Some two-fifths of the Cypriot banking sector was said to be held by foreign depositors, with the vast majority of those Russian. But Cyprus is hardly the only place in the Euro zone that is giving depositors problems. Here are seven Euro zone countries you should keep your money away from.
It might not be the only place having trouble with its banking system, but it certainly is the least advisable place to make a deposit right now — if that were possible, that is. The Cypriot government has reopened its banks, but depositors are currently limited to withdrawing a measly 300€ ($284) as part of capital controls, designed to prevent a run on the country’s banks, that may last over a month. In Cyprus’ case, lack of confidence in the banking system is not the only factor — the impending bank levy would be rendered useless if depositors could simply empty out their bank accounts — because you would have to be insane to want to the government to take 78% of your savings.
It seems that the Spanish are going to be pairing their sleepy afternoons with sleepless nights if economic indicators are anything to go by. The Spanish real estate market seems set to see a wave of foreclosures and bankruptcies in the near future, as banks begin to give up on so-called “zombie” developers — firms that are engaging in little active construction and hold more liabilities than they do assets, which actually constitute a majority of the 67,000 construction firms in Spain. Some estimates predict that enough land was purchased and enough units built to last Spain 30 years. Subsequently, the local banks bankrolled much of this construction — the cajas, already nationalised and privatised, have lost much of their trading value. This time, hundreds of thousands of small investors are at risk, and with them both depositors in the cajas and larger banks.
This small Adriatic nation — until recently touted as a European, post-Yugoslav success story (that to its credit, has maintained a credible liberal democracy)— now seems at risk of being the next nation to catch the “contagion” of financial crisis. Last week, Moody’s downgraded the country’s second largest bank as being “at risk of default,” casting an unpleasant pallor over the nation as a whole. Some 20.5% of all loans and a third of all corporate loans failed in 2012, while debt yields have tripled in the past week. The situation has become so serious that the Slovene prime minister, Alenka Bratusek, was forced to state, “Our banking system is stable and safe, ” as if she could have said anything else.
The greatest contagion of them all, Greece has managed to stay out of the news recently. But no news is not necessarily good news — just a reflection that there is worse news about. The Greek economy is expected to contract by a staggering 4.5% this year, its sixth straight year of recession. Meanwhile, banks are asking for more time to recapitalize, urging the government to extend the deadline into May. And there is the ever-present risk of the demise of the grand pro-austerity coalition, leading to an election that might catapult the anti-austerity left-wing SYRIZA (currently leading in the polls) party, or the explicitly neo-Nazi Chrysi Avgi (which is in third and rapidly growing), into power. Either result would lead to the Greek economy melting down once more.
The presence of the “next great emerging economy” on this list may seem jarring to many eyes, but there is evidence that all is not well in Turkey. For one thing it is decidedly no longer “booming,” GDP having grown a mere 2.2% in 2012, the same percentage as the United States. Much of Turkey’s growth, particularly infrastructural spending, is driven by loans by domestic banks, which have been consistently rising- 24% as of March 15 from 16.5% in the beginning of the year, according to central bank data. The government has been trying to put a stop to this in recent days through debt sales, which creates the difficult situation of pursing such dampening policies in a time of tepid growth — reminiscent of the “stagflation” of the 1970s. This comes at an uncomfortable time for Turkey’s major banks, which are currently being investigated for collusion.
Many experts are beginning to fear that Italy will be the next nation to be afflicted by a financial crisis, here caused by the mere worries of a crisis. Italy remains without a government since the elections in February, with Mario Monti remaining caretaker. The lack of a government unsettles many in the financial sector, due to the inherent inability of the Italian government to respond to a crisis (as it is non-existent). Years of poor governance and corruption leave the Italian financial sector hopelessly entwined with politics, and visa versa, which in part has led to the emergence of former comedian Beppe Grillo’s Five Star Movement, which was the largest single party in the last elections. Grillo ran a populist campaign against foreign interests in Brussels, such as those as Georg Kramer, chief economist at Commerzbank who suggested in 2011 that Italy should levy a tax of around 15%, which seemed ludicrous at the time.
In the vein of “ludicrous ideas,” Luxembourg, which has the highest average income of any nation in the world, is the next at-risk nation in the European Union. In Luxembourg, bank deposits are about 23 times GDP, as opposed to seven times in Cyprus. Unsurprisingly, Brussels has had words of caution for Luxembourg, stressing that nations should be able to take responsibility for their banks — all but an impossibility here. But there does not seem to be a significant chance that a crisis would emerge at all.