I was reading recently an article regarding the imminent bankrupcy of the emerging markets (especially the ones from Eastern Europe). The author said in his investment blog that banks are now forcing up the interest rates in those countries. The increase in the interest rates would lead to a wave of personal bankrupcies in those markets, allowing the foreign investors to buy the local assets (especially the real estate assets from those emerging markets) very cheap. The scenario would be unfolding as we speak, whilst the peak of the crisis in the Eastewrn Europe should arrive somewhere in the middle of 2010.
The fallacies of this story are many. I will not enter into the details of the cosnpiration theory which seems to hide behind this pessimistic approach to the Eastern Europe economies. I will also not discuss here the fact that it is hard for the big banks to cooperate among them. Or the bank cooperating with the big investment funds, their competitors, would be a highly unlike – ier scenario. I will just mention the recent lessons that Dubai and Greece, two sovereign countries, whose recent developments are linked tot tourism and real estate investmentst, taught us.
First of all, the risk aversion is much increased. The more bankrupt a country or a company is, the less likely are the investors to buy its assets. The investors suspect (on good reasons I would say) that those assets are not worth investing in, since they can hardly be developed to their end means, and thus, not worth the trouble. It was the case with Dubai, which halted all of its real estate projects all of a sudden, and it is the case with the sovereign bonds from Greece. Who could have imagined such a wide ranging bankrupcy several years ago?
Secondly, I will just share with you a quote which resembles a lot with the current situation. And please keep in mind that the economic model described below did bankrupt in a massive way and destroyed billions of lives, whilst functioning:
“Owners of capital will stimulate working class to buy more and more of expensive goods, houses and technology, pushing them to take more and more expensive credits, until their debt becomes unbearable. The unpaid debt will lead to bankruptcy of banks which will have to be nationalized and State will have to take the road which will eventually lead to communism.” [Karl Marx, 1867]