Black Swans From Russia and How It Always Starts in Austria

‘It always starts in Austria’, an aged and, to be truthful, rather decrepit sage remarked the other day within my hearing.  Well, with all due respect to this fount of wisdom, it does not always start in Austria.  The 2008 financial crisis, for example, began far away from the banking halls of Vienna.  

However, events in Austria have alerted the world at large often enough to the imminence of financial meltdown to make markets edgy when they hear ill tidings from that quarter.  It is fairly well known that the Creditanstalt collapse on 11 May 1931 marked the point where what had been a distemper of the capital markets transmuted into a banking crisis and economic depression.

Less widely appreciated is how the first intimations of the onset of the so-called Long Depression of 1873-96 came with the crash on the Vienna stock exchange on 9 May 1873.  This followed Bismarck’s decision, in the wake of the Franco-Prussian War, to introduce as currency in the new German Empire a gold mark and thereby to demonetise silver, the metal on which Austria-Hungary’s financial system was based.  

Over and above these financial events, of course, the actions of Austria-Hungary’s government following the Sarajevo incident in 1914 precipitated a financial crisis that culminated in the closure of the London Stock Exchange on 31 July, four days before the UK’s declaration of war on Germany (though it was another eight days before the UK declared war on Austria-Hungary).

Perhaps it is with these echoes from history that financial markets this week have grown restive over the capital position of Raiffeisen Bank.  The bank’s management sought to reassure investors regarding its capital strength and the further measures they intended to take to allay concerns.  This was after credit default swaps (CDS) on the bank’s subordinated bonds had signalled a 70 percent probability of default within five years.  Investors generally are nervous over the prospects of Austrian banks, especially in relation to their Swiss franc lending in central and eastern Europe.  These loans have become more burdensome to borrowers since the Swiss National Bank abandoned the cap on its currency, raising the risk that they might default.  For some Austrian banks and their subsidiaries, an even more serious threat may arise from their lending in Russia and Ukraine.  There are no signs that the hostilities in eastern Ukraine are abating; on the contrary, some reports suggest they are intensifying. International sanctions are damaging Russia’s economic prospects though, in a show of strength, the central bank today decided to cut interest rates.

EVENTS IN AUSTRIA HAVE BEFORE ALERTED THE WORLD TO THE IMMINENCE OF FINANCIAL MELTDOWNAt the same time the government in Kiev, with its finances creaking under the strain of heavy military expenditure, is requesting more financial support from its western political backers than they have so far shown willing to grant. In these conditions, no early improvement in the outlook for credit in either Russia or Ukraine is likely.  Lenders to the region will probably remain apprehensive.  The markets generally will continue to be sensitive to any bad news relating to these lenders.

Over the past few months, many have focused on the cost to Russia of economic sanctions and of the fall in the oil price but they may have paid too little attention to how the Russian government is likely to react.  

Political circles in Germany are taking a more realistic view, perhaps because their long dealings with Moscow afford them a deeper insight into the complexities of Russian policymaking than Anglo-American observers generally possess.  German leaders are not assuming, as many appear to be, that the Putin regime will soon collapse under economic pressures.  Rather, Frank-Walter Steinmeier, the German foreign minister, was yesterday musing on the appropriate EU response, should Russia launch a full-blown military offensive in Ukraine.

Further, Russia is scoring diplomatic successes.  Moscow has taken advantage of cooling relations between Azerbaijan and the West to step up military supplies to the government in Baku.Such co-operation may bring President Putin a step nearer to what may be his ultimate objective in the Middle East.  

Tsipras chose his first showdown with the EU over  RussiaN sanctionsAnother route to that goal could lie through Greece. Many observers have been inclined to regard Greece’s differences with the EU authorities largely in financial and economic terms.  Whether the Greek government will wrest concessions from its euro zone partners that undermine the stability of the single currency is, indeed, an important issue.  

But elsewhere the EU-Greece stand-off may well be seen from a different viewpoint.  It is unlikely to be a coincidence that Alexis Tsipras chose to have his first showdown with the EU over the issue of Russia sanctions.  This was a clear signal from Athens to Moscow, if such a signal was needed, that Greece might now be detachable from the EU bloc. Mr Tsipras has no reason to shun Russian support; nothing in his personal history indicates ultimate loyalty to the Western-style capitalism the EU was partly set up to consolidate.

For the Greek people, affinity with Russia goes back centuries through Orthodoxy and common hostility to the Turks. They might not rebel against a realignment of their nation after what they have been through recently.  The financial markets are assuming Mr Tsipras, in the end, will have no alternative to accepting EU support other than the isolation and impoverishment of Greece.  But that may not be how he sees his position, and what will determine his actions is not reality but his perceptions.  

President Putin would doubtless hail a signal victory if he could detach a member-state from what he proclaims ever more stridently to be Russia’s historic adversary in the West. That might only be the start.  

Other hard-pressed peripheral members of the euro zone might be tempted to move in Greece’s direction if austerity continued to be a condition of EU membership.  The spectre of the late 1940s, when it was feared Russia would come to dominate southern Europe as it dominated the east would stalk the chancelleries of NATO nations.  When populations are desperate, they take to desperate courses.

More about the author

About the author

Stephen’s career spanning five decades has made him one of the most respected and unique voices in the City of London. Disclaimer regularly publishes a selection of his elegant and thoughtful essays on the global economy, which he has been writing regularly since he founded Fifth Horseman Publications in the late 1980s. As well as an economist, Stephen serves as Treasurer of the Forum for European Philosophy and was elected to the Royal Institute of Philosophy.

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