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Who else is at risk?
Ukraine Violence Sparks Fear for Neighboring Countries

The worsening violence in Ukraine is raising fears that economic problems will spread to other fragile and troubled countries in Europe and beyond. As the Financial Times reports, investors worry that the turmoil in Kiev could hurt neighboring countries like Poland in a variety of ways.

Donald Tusk, Poland’s prime minister, urged the country’s parliament “to prepare Poland and Europe for the most dramatic possibilities”, in a speech that showed the degree of concern felt in the country most directly exposed to Ukraine’s turmoil.

Any big exodus of refugees would affect Poland, whose hospitals are already treating wounded protesters, even though economists say the country’s economy is robust enough to ride out a bout of instability.

Perhaps more significantly, emerging markets around the world have been under pressure due to hints that the United States might be tightening Fed policy as its economy slowly improves. Some of Ukraine’s biggest problems are economic. Here’s more from the FT:

“A default could have a destabilising impact,” said Koon Chow, head of emerging markets strategy at Barclays Capital. Ukraine could only be a trigger for a return of gloom to emerging markets – but with emerging markets still fragile after the last month’s sell-off, and political crises deepening from Venezuela to Thailand, “we didn’t need much”.

Given the herd psychology and trigger-happy nature of financial markets, a meltdown in Ukraine could lead investors to flee other worrisome emerging markets where there are worries. Thailand, Brazil, and Turkey, for example, are especially at risk. It has happened before in financial history that trouble in one country marks a tipping point in market psychology. Just one more thing to worry about as Ukraine drifts closer to the edge.

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  • Bruce

    When the U.S. implodes because of debt, it will most likely be the result of a contagion which starts elsewhere. Debt ridden Japan has always seemed like a possible starting place. The Ukraine situation is probably not the trigger, but the best defense is to not be vulnerable in the first place. Unfortunately, we are vulnerable – very much so. Other countries are in worse shape, but we aren’t immune. Thank you free spending politicians and money printing central bankers.

    • John Stephens

      “Some damn foolish thing in the Balkans”.

    • free_agent

      You write, “When the U.S. implodes because of debt”.

      But it’s unlikely to do so. The federal debt is high but tolerable, and is projected to drop over the long run. It’s lower than it was in 1950, which is more or less when the US started to take over the world. Business and household debt has dropped dramatically during the last few years. And the lenders have shown no anxiety about lending the government as much money as it wants.

      • Bruce

        I disagree. The debt isn’t tolerable because of future obligations, bad demographics and the changing psyche of the population. If the deficit drops from $1.2 trillion to $600 billion, that’s not a reduction in debt. It’s $600 billion of new debt. In addition, lenders have shown a reluctance to lend money to the broke government at low rates. It’s why the Fed buys so much of it at subsidized rates with counterfeit money.

        • free_agent

          The problem isn’t as bad as it looks. Here are some reasons why:

          The bulk of the future obligations are Social Security and health care benefits that aren’t legally debts. Congress can cut those budgets if it chooses. Yes, the voters are preventing that right now, but right now they don’t have to raise taxes to pay the current benefit schedule.

          The critical number is the national debt vs. the GDP. If the debt rises slower than the GDP, the debt burden becomes more affordable over time. So we don’t have to eliminate the federal deficit, just get it below that percentage of the GDP (which is a lot easier politically).

          You write, “the changing psyche of the population”. Do remember that in the current Little Depression the population has suddenly started saving again. That is actually causing problems in the housing market, because people are asking “How little can I spend on a house?” rather than “How big a mortgage can I convince someone to give me?” That change in mindset is going to leak through into the federal finances to some degree.

          You write, “lenders have shown a reluctance to lend money to the broke government at low rates”. But “broke” is a matter of mindset. E.g., there are a lot of very affluent people who are constantly borrowing more money, but since their income is expected to continue rising, they don’t have to pay excessive interest to borrow. All the evidence is that the world’s lenders look at the US federal government in that way, they consider the only limitation on the US’s creditworthiness the *willingness* of Congress to pay, they have no doubts of it’s *ability* to pay.

          You write, ” It’s why the Fed buys so much of it at subsidized rates with counterfeit money.” What you mean is, “The debt of the US government is legally payable using a currency which the US government can print in arbitrary amounts at any time.” Think about it…

          There is a further complication that the Chinese government does not buy US debt as an investment, but rather as a device to keep their currency cheap, stoke up manufacturing employment, and thus keep the population docile. So they have an intense incentive to keep buying US debt, and they don’t deeply care about getting paid back. If China reaches industrialization *without a revolution*, and then has to put all those bonds in a pile and burn them, the Chinese government would consider that to be an acceptable outcome. (In a sense, this is a version of the epigram, “If you owe the bank a thousand dollars, you have a problem. If you ower the bank a million dollars, the bank has a problem.”)

  • free_agent

    You quote, ‘Donald Tusk, Poland’s prime minister, urged the country’s parliament “to
    prepare Poland and Europe for the most dramatic possibilities”’.

    OK, *that’s* a reason to care about Ukraine. Ukraine itself doesn’t matter much; Poland does.

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