The cause was a report by Moody’s issued in London titled “West European ownership of East European banks during financial and macroeconomic stress”. The European media is all over this and a little time at FT.com made today’s action intelligible to me.
In the report, Moody’s described the nightmare in Eastern Europe and the massive exposure to it of Western European banks. According to Nomura’s Mr. Montalto, 80% of emerging Europe bank assets are owned by Western European banks.
According to Moody’s, Eurozone banks have $1.5 trillion in liabilities in Central and Eastern Europe with 84% concentrated in six countries: Austria, Italy, France, Belgium, Germany and Sweden. The Moody’s report described the crumbling economies and deterioting loan quality in Eastern Europe. They highlighted five large Western European banks with a lot of exposure: Raiffeisen, Erste Bank, Societe Generale, UniCredit and KBC.
This resulted in a huge selloff in European banks which infected the entire European market. US markets sold off as well when they opened this morning.
Adding to the nightmare is that apparently many loans made by Eastern European banks were made in euros and swiss francs. As the local currencies tank, and the locals who took out the loans conduct their lives in the local currencies, it becomes harder and harder for them to pay back the euro and swiss franc denominated loans. “Local currency depreciation is a major risk to East Europe banks,” Moody’s analysts wrote in their report