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Failure to Save East Europe Will Lead to a Worldwide Meltdown
The current Eastern European financial debacle could shatter the fragile banking systems of Western Europe and trigger the next financial catastrophe. Austria has made frantic efforts to structure a rescue plan for the area; its banks have lent €230 billion to the region, or 70% of Austria 's GDP. A failure rate of 10% would lead to the collapse of the Austrian financial sector and, unfortunately, that is about to happen. Eastern Europe has borrowed $1.7 trillion abroad; it must repay, or roll over, $400 billion this year, or a third of the region's GDP, even as credit windows have closed. Not even Russia can easily cover its $500 billion dollar debts while oil languishes near $33 a barrel. Poland , Hungary , the Balkans, the Baltic, and Ukraine are all suffering from a variation of the US subprime debacle, brought on by the same sort of financial recklessness by lenders and borrowers. The difference is that European banks are on the hook for both, while US banks are not. Almost all Eastern bloc debts are owed to Western Europe , and Europeans account for an astonishing 74% of the entire $4.9 trillion in loans to emerging markets. Eastern Europe may need €400 billion to help cover loans and prop up the credit system. Europe 's governments, pressuring their banks to pull back, are making matters worse. The sums needed are beyond the limits of the IMF, which has already bailed out Hungary , Ukraine , Latvia , Belarus , Iceland , and Pakistan - and Turkey next - and is fast exhausting its own $200 billion reserve. Soon the world is going to discover that Europe 's financial system is sunk, with no lender of last resort available to flood the markets with emergency stimulus. With accidents waiting to happen across the region, the EU has no framework for dealing with them. Europe is in deep trouble. We wait and watch, writes Evans-Pritchard, as the lethal brush fires move closer. If one spark jumps across the Eurozone line, there will be a global systemic crisis within days.
