Paul Lachine

The Euro Zone’s Default Position

Like the over-leveraged euro-zone countries today, Kazakhstan binged on easy loans from global investment banks in recent years, before its banks defaulted on their loans in 2009. If European leaders are smart, they will recognize that a Greek default is similarly inevitable - and that it may be just what the European (and global) financial system needs.

WASHINGTON, DC – Kazakhstan may be far removed from the euro zone, but its recent economic experiences are highly relevant to the euro’s current travails. As the euro zone struggles with debt crises and austerity in its weaker members, Kazakhstan is emerging from a massive banking-system collapse with a strong economic recovery.

For most of the last decade, Kazakhstan gorged on profligate lending, courtesy of global banks – just like much of southern Europe. The foreign borrowing of Kazakh banks amounted to around 50% of GDP, with many of these funds used for construction projects. As the money rolled in, wages rose, real-estate prices reached to near-Parisian levels, and people fooled themselves into thinking that Kazakhstan had become Asia’s latest tiger.   

The party came to a crashing halt in 2009, when two sharp-elbowed global investment banks accelerated loan repayments – hoping to get their money back. The Kazakh government, which had been scrambling to support its overextended private banks with capital injections and nationalizations, gave up and decided to pull the plug. The banks defaulted on their loans, and creditors took large “haircuts” (reductions in principal value).

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