Defaulting banks - where will it stop?

[Jan Klimkowski]

Long, fairly conventional article in Der Spiegel, with the self-explanatory title of: "What Happens When Countries Go Bankrupt?"

The full article is here:
http://www.spiegel.de/international/busi...19,00.html

Here's an excerpt:

Can the IMF Keep Up?

But what happens if the IMF runs out of money? The Washington-based financial fire department has already promised to pony up €27 billion ($34.3 billion) for Iceland, Ukraine and Hungary. This is about one-fifth of the funds the IMF currently has available for such packages, and Pakistan is looming.

Should the virus of financial failure continue to spread, the €156 billion currently available to the IMF would soon be exhausted. If that happened, the major industrialized nations would have to inject additional funds and provide the IMF, possibly through loans, with fresh capital for the high-risk countries. Global investors would hardly be interested.

And what happens if capital flight from the faltering threshold countries fuels the greed of speculators even further? For months now, they have been betting their money on, not just the ruin of banks and insurance companies, but the demise of entire countries. "It's blood in the water for the hedge fund sharks," wrote Britain's Sunday Telegraph, noting that economies like Hungary's are simply too weak to resist.

"Major players in the foreign currency market, like hedge funds and banks, are betting on the further decline of Eastern European currencies," says Hans-Günter Redeker, chief strategist with the foreign currency division of French banking conglomerate BNP Paribas. The gamblers have also set their sights on Ukraine, Poland, the Czech Republic, Romania and Turkey. Even Russia, the natural resource paradise, is seen as a worthwhile bet, because it will hardly be able to defend the ruble for much longer, given the massive exodus of capital.

The entire world is currently spooked by the Argentine ghost. Even if wealthy countries reach out to ailing nations, some governments will not survive the storm. Even this would not be truly dramatic. But if the industrialized nations then decide to leave the threshold countries to their own devices, the ensuing wildfire will burn indefinitely.