It was only a matter of time before pre-war apocalyptic poetry started being quoted in Financial Crisis reporting, but I am happy to see it is by Paul Krugman, and in a very interesting article that all of us interested in emerging markets need to heed.

From The Widening Gyre – NYTimes.com:

Economic data rarely inspire poetic thoughts. But as I was contemplating the latest set of numbers, I realized that I had William Butler Yeats running through my head: “Turning and turning in the widening gyre / The falcon cannot hear the falconer; / Things fall apart; the center cannot hold.”

The widening gyre, in this case, would be the feedback loops (so much for poetry) causing the financial crisis to spin ever further out of control. The hapless falconer would, I guess, be Henry Paulson, the Treasury secretary.

And the gyre continues to widen in new and scary ways. Even as Mr. Paulson and his counterparts in other countries moved to rescue the banks, fresh disasters mounted on other fronts.

Some of these disasters were more or less anticipated. Economists have wondered for some time why hedge funds weren’t suffering more amid the financial carnage. They need wonder no longer: investors are pulling their money out of these funds, forcing fund managers to raise cash with fire sales of stocks and other assets.

The really shocking thing, however, is the way the crisis is spreading to emerging markets — countries like Russia, Korea and Brazil.

These countries were at the core of the last global financial crisis, in the late 1990s (which seemed like a big deal at the time, but was a day at the beach compared with what we’re going through now). They responded to that experience by building up huge war chests of dollars and euros, which were supposed to protect them in the event of any future emergency. And not long ago everyone was talking about “decoupling,” the supposed ability of emerging market economies to keep growing even if the United States fell into recession. “Decoupling is no myth,” The Economist assured its readers back in March. “Indeed, it may yet save the world economy.”

That was then. Now the emerging markets are in big trouble. In fact, says Stephen Jen, the chief currency economist at Morgan Stanley, the “hard landing” in emerging markets may become the “second epicenter” of the global crisis. (U.S. financial markets were the first.)

What happened? In the 1990s, emerging market governments were vulnerable because they had made a habit of borrowing abroad; when the inflow of dollars dried up, they were pushed to the brink. Since then they have been careful to borrow mainly in domestic markets, while building up lots of dollar reserves. But all their caution was undone by the private sector’s obliviousness to risk.

In Russia, for example, banks and corporations rushed to borrow abroad, because dollar interest rates were lower than ruble rates. So while the Russian government was accumulating an impressive hoard of foreign exchange, Russian corporations and banks were running up equally impressive foreign debts. Now their credit lines have been cut off, and they’re in desperate straits.

Needless to say, the existing troubles in the banking system, plus the new troubles at hedge funds and in emerging markets, are all mutually reinforcing. Bad news begets bad news, and the circle of pain just keeps getting wider.

Could it be that the Balkans will once again find itself at the centre of a global conflagration?

Hungary and Romania’s dire economic situations brought on by the global financial crisis are triggering major alarm bells about Austria and Italy – the two countries who are at the forefront of large scale banking investments into the Balkans. As Stratfor reported today:

Italy is one of the world’s core economies, with a gross domestic product (GDP) of more than $2.1 trillion. It is the fourth-largest economy in Europe and seventh in the world, with one of Europe’s wealthiest and most influential financial regions centered in the historical banking hub of Milan. A serious problem in the Italian banking system is therefore a dire signal to the rest of Europe. Any problem in Italy would reverberate throughout Europe, potentially cascading into a serious eurozone conflagration that could spell doom for the euro and the monetary union.

Italy’s problems are twofold. The first issue is the Italian banking sector’s exposure to emerging Europe (Central Europe and the Balkans), and the second is that Italy has poor economic fundamentals.

On October the 20th Stratfor reported that:

Austrian banks could be dramatically affected by the financial crisis unraveling in Hungary. In turn, this could have serious implications for the rest of Europe.

…Particularly aggressive in moving into the region were Austrian banking giants Raiffeisen, Erste Bank, Volksbank, BAWAG P.S.K. and Bank Austria Creditanstalt (which is part of Italy’s UniCredit Group Central European banking empire). From their initial move into Central Europe in 1991, these banks expanded operations and practically dominated — along with Italian banks UniCredit and Banca Intesa — the banking sectors of all Central European and Balkan states. In fact, Austrian banks as a whole made 35 percent of their profits in Central European and Balkan markets in 2005 and currently dominate claims in inter-bank lending and short-term money market instruments. Overall Austrian bank exposure to the region amounts to nearly $300 billion, with only Italy (at $212 billion) approaching the same level of exposure. No country’s banking system, however, comes close to the total bank asset exposure to Central Europe and the Balkans, with somewhere between 15 percent and 20 percent of total Austrian bank assets being located in the region.

This inherently means that if a crisis in the region occurs, Austrian banks will be severely tested, if not completely devastated.

Stratfor go on to explain just how vulnerable the Balkans is to the global financial crisis thanks to  its recent consumer debt boom and massive risk taking by the banks that fed that boom.

In Serbia justa about evey high street bank is either Italian, Austrain or very occassionally, Greek (see bold names above).

They have thrown credit at people here leading to a completely artificial spending boom based entirely on consumer credit.

Apart from enslaving the people in debt, this has thrown the trade balance out of kilter and worsened inflation amongst other negative side effects.

I have long warned my Serbian friends not to fall victim to the consumer credit machine thats has enslvaed so many millions of Westerners. Some have been wise enough to resist the lure of easy “free” money, but most have not. It is a national shame that the government did not stop this with decent regulation.

Those Austrian and Italian banks saw a virgin market and acted both irresponsibly and ruthlessly to sell their credit here. They are now paying a hefty price for their greed, overexposure and rashness. I just hope that price is not the complete collpase of the European money system, and with it Eurozone and the EU.

These are all over town. The Uros in question is Uroš Mišić, a Red Star supporter recently sent to prison for 10 years for attempted murder of a policeman during this horrific incident last year where they tried to burn the cop death with flares.

Red Star football team players were given massive fines and a dressing down by the Prime Minister after wearing “Justice for Uros” T-shirts before a match, as a show of support.

Elsewhere in Belgrade I am told there is graffiti that reads “Uros, you will be fucked in Zabela”. Zabela is a notorious Serbian prison.

Why is it that so many institutions tend to have two tone walls?

Here is an example from Belgrade University…

This is a picture from Arte magazine…