I’m reporting this week from the Eastern front of the euro-zone meltdown, where an unfolding banking and confidence crisis could be another telltale sign of far worse things to come.
It’s hard to believe it was almost one year ago today, that here in Estonia — the small Baltic EU nation I call my second home — accepted the euro as our primary currency. Twelve months ago the changeover from the kroon to the euro was heralded with enormous fanfare and celebration — plus a great deal of hope and hype. Parades, festivals, PR campaigns, free euro coin holders were everywhere I turned. However, many people back then also had underlying fears of the change too.
And it seems those fears were more than just valid; they were prescient. Estonia had imposed strict self-austerity for a number of years to attain the “privilege” of adopting the euro as its currency. As a result, Estonia actually boasts the lowest debt-to-GDP ratio of any nation in the EU at just 6.6 percent!
The “reward” for this fiscal discipline: EU membership and being able to join much larger and much less responsible countries like Greece, Italy, and Portugal, and of course taking on the coveted euro. Estonia felt that by taking on the euro it would elevate the country to an equal footing with Western Europe, or at least put it at the table for discussions. Instead, it has risked LOWERING itself to equal footing with Western Europe.
Estonia’s banking system, similar to Latvia’s and Lithuania’s, is primarily based outside its borders. Swedish, Norwegian and other Scandinavian interests control the majority of the banks. The big three here are Nordea, SEB, and Swedbank, where I personally bank. There are a handful of others, but those are the primary players.
So for all of the advancements in the Baltics due to the European Union, the tenuous nature of these banks became very apparent just a couple of weeks ago. The Latvian bank Krajbanka failed and rattled the nation. In fact, it affected my family directly. My wife’s grandfather is a property owner in Latvia, and his business accounts were based at Krajbanka. At first the Latvian government said accounts would be insured, much like the U.S. does with the Federal Deposit Insurance Corp (FDIC). However, as the depth of the losses became evident, and it turned out that fraud had caused the collapse, it was announced that funds may not be able to be covered by the government program.
What most concerns me is the domino effect. Krajbanka’s collapse actually followed the collapse of its sister bank — Lithuania’s Snoras Bank. Both of these banks’ problems were based on fraud and deception, and exacerbated by concerns over the EU meltdown.
Then the completely unrelated Scandinavian bank Swedbank experienced a classic “run on the bank.” Almost half of Swedbank’s 298 ATMs in Latvia had to be replenished after running out of money just days after the collapse of Krajabank. Withdrawals rose tenfold. Swedbank raced to assure depositors and managed to quell the panic, at least for now. Meanwhile the EU uncertainty has only added to depositors’ fears of a banking or currency collapse. Critics say that Swedbank is not even in the same league as the Latvian or Lithuanian banks, and “there is no reason to panic.” Possibly. However putting the money in the mattress for the time being is looking a lot more attractive than any of these banks to many depositors in the Baltics.
Actually many wealthier individuals are converting their money to Sterling and supposedly buying real estate, all in an attempt to avoid the euro and buy hard assets.
Gold sounds even better to me. Even though a sharp correction is always possible, I agree that the bigger move is going to be to the upside. I am unanimous in my recommendation that you should have solid long-term core holdings in gold bullion or equivalent.