Financial Crisis Update- Which Countries Will Go Bankrupt?

The global financial crisis has hit a new phase- sovereign governments are becoming insolvent. Today Iceland and Ukraine went to the IMF for loans. Iceland is the first developed country to seek an IMF loan since Great Britain in 1976. Pakistan, Belarus, Serbia, and Hungary are reported to be in discussions with the IMF.

Reportedly, Iceland and Ukraine turned to the IMF after attempts to obtain loans from Russia failed, and Pakistan has attempted unsuccessfully to seek aid from China and is now in talks with Saudi Arabia.

There are major political implications for some of these countries. Reportedly, the IMF is demanding a one-third cut in Pakistan's military budget as a condition for aid. That might be a problem for a country with active insurgency connected with the unstable situation in Afghanistan. It could even lead to a coup. One wonders where the US is in all of this, since the amount sought from the IMF is a loan of $9.6 billion, which may actually be paid back. That is small change on the scale of US spending on its own internal bailout and wars in Iraq and Afghanistan.

Belarus, a virtual dependency of Russia, is remarkable because it means that Russia itself is in serious trouble. It is reported that CDS premiums on Russian debt have increased to 10.5%, which is (if the notoriously dysfunctional CDS market actually worked) supposed to approximate the difference between the interest rate on the covered bonds and prevalent interbank lending rates. The most recent edition of the Forbes billionaire list has stated that Russian billionaires have had $260 billion (!) in trading losses in recent weeks, and the Moscow stock market has had repeated trading halts because margin calls have led these "oligarchs" to dump shares in search for cash, which cannot be sold because the Russian non-oligarch population cannot afford to buy. Apparently the security of rich individuals depends on having a middle class to trade with. Who knew?

Ukraine, also affected by the Russian troubles, is in deep political crisis over allegations by Prime Minister Yulia Tymoshenko that President Viktor Yushchenko is involved in illegal arms trade with Georgia and Sudan. The Sudan allegation is connected with the interception of a shipment of Ukrainian tanks by pirates off the Somali coast. The political crisis has led to a dissolution of Parliament and the calling of the third elections since the Orange Revolution in 2005, which were first set for December 7 but have apparently been postponed. The postponement is at least for a week while the now un-dissolved parliament discusses the bailout.

Kazakhstan, another state linked to Russia, is also reported to be in major trouble, with its CDS rates being even higher than Russia's.

Hungary, a European Union member, may avoid needing an IMF bailout if European countries do it instead. Its currency has already dropped 16% against the euro since October 1 because it is unable to support its value with its euro reserves. Reportedly, Hungary has already recieved a loan of €5 billion from the European Central Bank.

Other countries with potential for default include Romania, Turkey, Latvia, and Argentina. Turkey is also in serious political crisis, with many opposition politicians implicated in the massive Ergenekon case, which in a 2,544-page indictment against 86 individuals which is expected to take weeks just to read, alleges that a secret state-sponsored terrorist organization is responsible for many unsolved incidents in the last fifty years of Turkish history.

So, we can expect a lot of turmoil in upcoming months. Meanwhile, the US government can be expected to be paralyzed until January 20 because of its own political upheaval, scheduled for a week from Tuesday.