Conditions are deteriorating wordwide (although the headlines from Australia are mixed). Eastern Europe is on everyone’s watch list. I found this via Naked Capitalism today. The Telegraph reports German CDS debt spreads hit record as economy crumbles:

Credit default swaps measuring risk on five-year sovereign debt touched 90 basis points on Tuesday and looks poised to rise above French debt for the first time.

The spike follows a warning by Deutsche Bank that Germany’s economy will contract by 5pc this year as industrial exports collapse at the fastest pace since the Great Depression.

…

“The entire Landesbanken system is rotten,” said Hans Redeker, currency chief at BNP Paribas.”Credit will collapse if they are allowed to fail so they have to be recapitalized. But it is not just the banks in trouble: Germany’s entire export structure has been hit drastically.”

“German CDS spreads are going massively higher. German bank exposure to Eastern Europe, although less than Austria, is still very high. The markets have started to price in a de facto bail-out of Eastern Europe and they think that Germany that will have to pay the bill,” he said.

The rating agency Standard & Poor’s said in a report on Tuesday that the region was “shuddering to a halt”, with a number of countries were “crumbling under the weight of high foreign currency debt.” It is unclear whether they can roll over debts as Western banks retreat to their home market.

S&P said foreign debt is 115pc of GDP in Estonia, 103pc in Bulgaria, 93pc in Hungary, all far above danger level. “All the ingredients of a major crisis are in place,” said Jean-Michel Six, the group’s Europe economist.

Austria, Germany, and Switzerland are all going to deal with incredible shocks on their banking system if Eastern European countries start defaulting on their debts. It appears as if this situation is actually worse than the Argentina crisis. When Argentina imploded, many of the lending institutions were otherwise in pretty good shape. This time around, there’s stress on banks and countries inside and out. The fact that German exports just went cliff diving is not helping things get resolved in an orderly fashion.