US Out Europe in…Risk turns on Euro Area

Risk in the US financial system is known and more or less quantified between USD 1000-1500bn (though deviation is large in different estimates but that doesn’t matter in this context). With the bankruptcies and bailouts of financial biggies in the US, people are being increasingly risk averse. Every weekend one big fat trophy is on sale...and here goes Wachovia! Government is working on a once in a life time bailout measure, as they are now tired of providing billions and billions of liquidity in the money market with no respite.

So the cat is out of the hat in the US, now the focus shifts to the Euro Zone and the UK about their malicious balance sheet. Out of the total write offs of around USD 600bn till date, 40% has been written off by the European banks. Almost all write offs have been done on their direct or indirect US exposures and investments made with US assets as an underlying. But now with their local economies also in sight of slowdown or recession, they face larger risk of losses/ impairments on their domestic lending and investments (with underlying European assets).

We have seen few European examples cropping up wherein UK government took control of UKs’ largest mortgage lender Bradford and Bingley; Llyods took over HBOS, and Belgium-The Netherlands-Luxemburg governments bailed out Fortis where in they bought 49% stake in their respective country’s operations. Germany is bailing out its 2nd largest commercial property developer Hypo Real Estate in its Euro 34 bn loan. The disease is spreading every passing day. And the more credit market deteriorates, more bailout candidates would emerge.

Investors have already discounted this threat and Euro Zone currencies are taking a beating and Euro and GBP are down by around 10% since March 2008 against the USD. It shows that investors are now being more skeptical of Euro zone and the UK than the US.