Financial Gotterdammerung - Round 2

Bank Austria and its Italian owner Unicredit face a "monetary Stalingrad" in the East

You simply must read this terrific article in yesterday's Telegraph by Ambrose Evans-Pritchard, detailing what is surely the next phase in the global Credit Crunch.

Everyone (especially Gordon Brown) knows that the current crisis started in America, caused by irresponsible mortgage lending to "an unemployed black man in a vest". See here for a concise explanation:



However, subprime mortgages were not the only insane lending boom of recent years - there was also a stupendous boom in East European borrowing, by the former Soviet bloc countries. As Evans-Pritchard's article notes, the total borrowed is in the region of $1.7 trillion, of which some $400 billion will have to be repaid (or rolled over) this year. And, most of it is owed to West European banks. Can you see what's coming?

Evans-Pritchard makes a simple and compelling case that "Europe's financial system is sunk". There are great quotes, such as the Latvian central bank governor's description of his economy - "clinically dead". Of course, to anyone with any knowledge of financial history, this will seem terribly familiar: the Wall Street Crash of 1929 may have been the initial shock, but the true pre-cursor of global depression was the systemic bank crisis that began in Austria in 1931.

Oh, and you know the bit above about how Bank Austria and its Italian owner Unicredit now face a "monetary Stalingrad"? You do know that Creditanstalt, the Austrian bank whose bankruptcy in May 1931 sparked the global systemic collapse, was nationalised after World War II, then sold to Bank Austria and is now part of Unicredit! Plus ça change, plus c'est la même chose.

Evans-Pritchard's bottom line is this:

If one spark jumps across the eurozone line, we will have a global systemic crisis within days.

So, are we ready?

Well, the main point of the CCI portfolio is to be ready for further such events. Time for a quick review:

iShares MSCI Singapore Index Fund (EWS.NYSE)
Obviously, this would not do well under such conditions, but neither would it be fatally affected - Singapore banks have avoided East Europe.

Lyxor Gold Bullion Securities (GBS.LSE)
If gold bullion won't do well under a global systemic crisis, then what will?

Market Vectors Gold Miners ETF (GDX.NYSE)
May or may not be hit, depending on whether mining shares are lifted by rising gold or punished by the more deflation. The 2008 experience suggests the latter.

Centamin Egypt (CEY.LSE)
As above.

iShares Government Germany 10.5+ (EXX6.DE)
"Berlin is not going to rescue Ireland, Spain, Greece ... Portugal ... Italy ... or ... Austria". I'm very glad I switched from IBGL to EXX6. Long-dated German government bonds are likely to prove as safe a haven as you will get.

M&G International Sovereign Bond Fund
More broadly, let the experts at M&G continue to find the best-value government bonds.

CurrencyShares Japanese Yen Trust (FXY.NYSE)
Again, this is one crisis that Japan has no direct exposure to.

Junk Bond Funds (ILH & NCV)
No dodging the bullet here, these would be slaughtered by a further collapse in global credit. Remember diversification, though - there is no certainty of the European collapse happening, "things can only get better" (maybe).

Lots of cash in USD (no GBP any more)
Can't go wrong much here.