Austria Facing Banking Collapse; Credit-Anstalt II?

Global Economic Crisis: Austria Facing Banking Collapse
Is This Another 1931 Credit-Anstalt Financial Crisis?

By Sheldon Filger | Spring, 2009

While economists, analysts and media pundits argue over the character of the Global Economic Crisis and the semantic issue of whether or not it is a global depression, or merely a 'synchronized global recession', there are far more urgent matters at hand. As the Spanish-American philosopher George Santayana once presciently noted, those who forget the errors of the past are condemned to repeat them. It appears that a horrific financial disaster of the past may be about to be replicated in a much more destructive form. Does anyone still recall the collapse of the Credit-Anstalt?

Created in 1855, with links to the Austro-Hungarian nobility and Rothschild banking family, Credit-Anstalt was the world's first investment bank. It was the catalyst of many of the most important infrastructure projects in the last decades of existence of the Hapsburg Empire. In the years after World War I, this Austrian bank engaged in major speculation throughout Europe [[particularly Central and Eastern Europe: normxxx]], giving all the appearances of being a highly profitable financial institution. Even after the stock market crash on Wall Street in 1929, Credit-Anstalt sought to conduct business as usual, though the economic contraction that followed the 1929 crash transformed a growing proportion of its balance sheet into non-performing assets. When the bubble burst on May 11, 1931, it sent shock waves throughout the world's financial system.

Contrary to public perception, the Wall Street Crash of 1929 was not the major catastrophe of the Great Depression; it was merely the precipitating event. In fact it was the bankruptcy of Credit-Anstalt in 1931 that made the Depression truly global, and crippled banks throughout Europe and North America. The resulting run on banks throughout the world, with numerous banking failures, was the catalyst that accelerated the rise in global unemployment. When Franklin Roosevelt assumed the U.S. presidency in 1933, his first major task was to attend to the deplorable state of the U.S. banking system. That reality was at least in part attributable to a chain reaction of financial failures that stemmed from the insolvency of Credit-Anstalt.

Now we are in 2009, with the subprime mortgage securities debacle having been the underlying cause of the state of insolvency afflicting America's largest banks [[and, laterally, the EC banks: normxxx]]. The U.S. government, including Congress, Treasury and the Fed, have injected or issued backstop guarantees to the tune of trillions of dollars, in a frantic effort aimed at keeping these zombie financial institutions artificially alive. Yet, in this truly global economic and financial crisis, events in other parts of the world may render mute and futile all the trillions of dollars the U.S. is borrowing to save the American and global financial system. As in 1931, it may well be the Austrian banking sector that is the final nail in the coffin of the current globalized financial order.

With the fall of communism, former East Bloc European states were encouraged to borrow heavily by their Western brethren, with Austrian banks leading the way. Governments in Eastern Europe borrowed massively to finance the modernization of their industries, with the goal of providing lower-cost industrial goods and commodities to consumers throughout Western Europe. In addition, consumers in Eastern Europe were encouraged to borrow money in Euro currency at low interest rates for homes and consumer durables.

When the Global Economic Crisis hit Europe, demand destruction afflicted the highly leveraged new industrial plants in Eastern Europe. In addition, the consumers who unwisely borrowed money from Western banks in Euros were devastated by the collapse of their home currencies. A new housing crisis has arisen in lands as diverse as Hungary, Bulgaria and Romania [[but it is Latvia that is on the brink of default: normxxx]].

The non-performing assets on the balance sheets of European banks are enormous [[a figure of ~$25 Trillion has been bandied about: normxxx]], and have affected many countries throughout the Eurozone. However, in terms of percentage of toxic assets to GDP, no European state is in as precarious a state as Austria. More than $250 billion in bad assets are poisoning the balance sheets of Austrian banks, a sum equal to more than 62% of the nation's GDP. By way of comparison, if the admittedly shaky U.S. banks held toxic assets in the same ratio to GDP, this would equal $8.7 trillion dollars in bad assets. If America's banking disaster was on the same scale as Austria's, it would require a dozen TARP programs to cover the holes on the balance sheets.

Is another Credit-Anstalt catastrophe in the works? The macroeconomic data emerging from Europe looks increasingly gloomy. In addition, the European Union is proving to be both disunited and uncoordinated in facing up to mounting evidence of a financial avalanche that may bury the Union and everything else with it, including the common currency. Policymakers throughout Europe are arguing over "Eastern European stabilization funds", protectionism versus "free trade," and other issues, both real and distractions, while the financial underpinning of the entire European economic system is ablaze.

Just as Iceland was the first nation to become nationally insolvent due to bank failures stemming from the Global Economic Crisis, Austria may be fated to endure a similar disastrous outcome. Should Austria's banks fail as spectacularly as did the Credit-Anstalt back in 1931, the impact on the world's financial and economic order will be at least as catastrophic and likely much worse.

Will [2010] prove to be 1931 redux? The indicators favor the pessimists far more than the optimists. [[So far, the EC banks have supported Latvia though 'backdoor' loans; but how long can this go on!?!: normxxx]]