A potential intensification of the financial crisis is looming above the Eurozone, one which can be best summed up by the single word globalisation.

A recent article in the U.K. Telegraph, written by Ambrose Evans-Pritchard (http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/3260052/Europe-on-the-brink-of-currency-crisis-meltdown.html), and another in the online forex traders’ journal Currency Trader, by Barbara Rockefeller, discuss how multiple major European banks have written significant quantities of loans to businesses and individuals within emerging economies. These loans, under normal circumstances a reasonable risk, have been exposed to the shifting balance of fluctuating currencies, making repayment more difficult and expensive for the borrowers at the same time these emerging economies are suffering the effects of the global slowdown.

As an example, almost 90% of all mortgages written in Hungary since 2006 have been denominated in Swiss francs. With a greater than 15% shift between the Hungarian forint and CHF, house notes in Budapest are skyrocketing, just as their U.S. adjustable-rate counterparts did when the FOMC raised interest rates, which of course was the initial impetus for the subprime mortgage debacle in 2007 and the immediate cause of the ongoing financial meltdown. The possibility of rising defaults and foreclosures carries significant risk for the Swiss banks funding these loans, which equal approximately 50% of Swiss GDP.

Similar situations exist in many nations throughout the former Soviet bloc region, as well as parts of Asia, and Central and South America. The vast majority of these loans originated in Western European banks, specifically in Italy, Switzerland, Greece, Spain, Sweden, Austria, and the U.K., with exposure levels ranging from 23% of GDP in Spain to 85% in Austria. The sums under discussion are far higher than those which caused the original subprime-mortgage crisis, with vastly greater potential for damage both to the banks involved and the underlying economies affected, both lenders and borrowers.

Steps have been taken to mitigate the situation, including loans from the IMF, World Bank, and ECB to the debtor nations, with Hungary the first recipient. Many of these nations are also quickly queuing up to join in the single currency, which could potentially bury their relatively small-scale financial crisis within the greater depth of the Eurozone as an economic whole. However, the possibility of major bank failures within Western Europe is significant.

Although this situation raises the likelihood of great economic hardship for the region involved, it also carries equally great potential for further depreciation of the Euro against the other major trading currencies, in particular the U.S. dollar and Japanese yen, as these nations’ banks have almost no exposure to emerging economies’ loans.

Forex traders are advised to monitor this situation with special attention paid to the ECB’s swap line with the U.S. Federal Reserve, which gives some indication of the ECB’s need for USD to fulfill its obligations and provide liquidity within the region of its mandate. Should a similar swap line be established between the Bank of Japan and the ECB, that would indicate a shortage of JPY as well, which would tend to confirm the depth of the problem and have a detrimental effect on EUR, encouraging a continuation of the downtrend perhaps as far as parity with USD.