Eastern Europe – the calamitous cost of Foreign Currency Mortgages

January 10th, 2012

15 years ago, I went to go and live and work in Luxembourg for what turned out to be a very happy few years in pre-euro euroland. Latterly I was working in the Middle Office of a Corporate Treasury Department where I became familiar with interest rate swaps and how widely debt was priced around the world. I subsequently did a little investigation into taking out a foreign currency mortgage – specifically in Japanese Yen – which back then was paying next to no interest unlike all the other major currencies. Alas, I was politely rebuffed on the grounds of not really being a player !

Obviously, a lot has changed since then. Today, it seems you don’t have to be a player at all. In fact, anyone can get them – especially if you are working/middle class Eastern European and not remotely interested in hedging for averse currency movements. So what happened?

This Economist article from a couple of years ago gets it right by calling it Austria’s very own subprime invention. This table below, also old, sums it up quite nicely.


Since then of course, it’s got substantially worse in nations like Hungary – now with a BB+ rating – as the Swiss Franc has superspiked in value, massively increasing the cost of CHF-based mortgages across Eastern and Central Europe – about 1.7 million in total apparently.

So it’s not just Euroland that is in trouble with the Euro. What Donald Rumsfeld used to call New Europe is in trouble too – but with a quite different kind of currency problem.

Would that our economic life and times be simple and predictable again, with all our living standards gently rising year after year !


France’s debt risk: CDS spreads or 10 year bond yields?

December 23rd, 2011

Ok – so much for France’s leaders instructing the ratings agencies to downgrade Britain. I don’t think for a moment that things are that great here but those agencies will have noticed that the UK’s position is better than France for some of the following rather important reasons;

i) Longer average maturities of British government bonds (gilts, we should say) –  13-14 years versus 7-10 years for France. This means that the French government has to raise more capital over a shorter period of time to pay its bills.

ii) Less foreign ownership of those government bonds – the BoE owns a lot – purchased from financial institutions – due to quantitative easing and will not dump them anytime soon, making yields shoot up

iii) Much, much less exposure of UK banks to Southern European sovereign debt – particularly Greece

For these reasons and some others, the UK government currently (as at 22/12/2011) pays just over 1 % less for 10 year debt – 2.049% versus 3.072% – as per the chart from Bloomberg below.














That’s bad enough. But yesterday I caught sight of a fascinating article in the WSJ, Super-Safe Assets Run Short Around Globe. As this table from the article shows, safety conscious investors appear to be putting a much higher premium on the cost of insuring French debt against default – more than two and a half times – than the UK’s over 5 years. In fact, the UK is even ahead of Germany.


CDS spreads are not a perfect guide to the future of course. And I’m not sure about Switzerland being behind the USA. Still, they do give us a rather more complete picture that includes investor sentiment – and right now, that is looking far from reassuring.








Which way for sterling next against the Euro and Dollar?

July 16th, 2011

As this chart shows, sterling has just gone through 18 months of value stability against the dollar and the euro. That’s actually quite a long time. With everything happening now in Euroland and the USA going up against the wire on lifting the debt ceiling, I just wonder if the pound might be due for a long-anticipated recovery?

Italian and Spanish bond yields put Europe on tenterhooks . . .

July 12th, 2011

I don’t know how the final days of the Euro saga will pan out.

The only thing I’m sure of is that it will be very ugly and it’s demise won’t do us Brits any good unless you have a formula for pricing in Schadenfreude. I’m also staggered by the decision of the ECB to raise interest rates a quarter of a point to 1.5%.

So the big spike yesterday in the yield of Italian and Spanish bonds suggests to me that we are approaching the Euro endgame. Bailing out Greece is one thing. Supporting Spain and Italy would be an impossible other. If the yield goes to a fatal line of 7% according to Ambrose Evans-Pritchard in today’s DT, then it’s game over. Below is a chart of the Italian 10 Year Bonds. Spain is worse – just over 6%.


It’s the total size of the debt that makes it expensive . . .

May 17th, 2011

Beat this for a sobering bar chart in today’s Wall Street Journal;

The shocker is that while the UK has a lower interest rate than Euroland and can borrow at lower rates than every other major European country other than Germany, we are only just behind most of the  PIIGS (Portugal, Italy, Ireland Greece and Spain) when measured by the total cost to GDP of interest payments on borrowing at 3.1% while Spain is some way down at 2.2%.

I still think the story that the UK was facing bankruptcy etc. was way overblown and at times, silly. As I have argued here and here.

But who wants to spend 3.1% of GDP on interest payments while simultaneously trying to enshrine in law a commitment to Foreign Aid of 0.7%?


The diverging unemployment stories in the USA, Britain and Spain

November 9th, 2010

A couple of weeks ago, I was invited along with other youngish economics types  by the excellent Centre for the Study of Financial Innovation to a dinner with a top financial journalist. Macroeconomic forecasting is notoriously unreliable but I raised the question about why British unemployment (now 7.7%) hadn’t gone up anything like as much as anticipated with a 6% fall in GDP (about a million short according to Nadeem Walayat of Market Oracle) whereas US uemployment (now 9%) clearly had. What did this say about flexible labour markets in downturns when the UK’s was clearly less regulated in the early 90s?

There were several answers put to this from the speaker and around the table which I found fascinating;

Read the rest of this entry »

Is the breakup of the Euro fast approaching?

September 21st, 2010

It has been 6 months since I showed in chart form here, sales the credit default swap spreads over 5 years for Germany, the UK and the PIIGS. Then I was arguing that the UK was absolutely not in danger of default and it seems that events have borne that out.  Well clearly, for the other countries quite a lot has happened since then – just take a look at this;

So Greece – particularly, Ireland and Portugal are all considerably worse.  The UK has tentatively improved its position vis a vis Germany and Spain because of the sheer scale of the country compared to the other minnows, is one still to keep a close eye on.

One city expert tells me that because the EU/IMF aid package is in place for Greece and on-hand for Ireland and Portugal, default is not yet on the cards.  That certainly makes eminent sense. And yet, writing yesterday in Critical Reaction, Tim Congdon says in PIGS to the Slaughter? that the two key facts emerging are;

1. The PIGS’ banking systems have not – so far – been able to repay their ECB borrowings. If the banking systems are eventually unable to repay the loans, the ECB will suffer a loss.

2. The ECB has already incurred losses on the bonds it bought in May, because of the adverse yield movements already noticed.

These issues are bound to be raised by the five German professors who are testing the legality of the May support package for Greece at the German Constitutional Court. The losses that the ECB is now taking on its interventions to help the PIGS undoubtedly constitute a breach of the no bailout clause of the 1992 Maastricht Treaty. If words have any definite meaning, the German Constitutional Court must deem the ECB’s actions and the Greek rescue inconsistent with that treaty and therefore illegal. The Eurozone remains in great trouble.