Meltdown fear for debt-laden nations

By David Oakley, Capital Markets Correspondent

Published: October 18 2008 01:41 | Last updated: October 18 2008 01:41

As the credit crisis deepened this week, a clearer picture emerged of which countries are most at risk from the financial turmoil that saw markets around the world swing violently.

Following the virtual seizing up of the Icelandic economy, countries such as Hungary, Argentina and Pakistan look vulnerable as they struggle to pay their bills.

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Nigel Rendell, senior emerging markets strategist at RBC Capital Markets, said: "Iceland has in effect defaulted as its banking system has collapsed and business can’t transfer money. Banks and investors fear other countries could default too, so they won’t lend to them. These countries are from the developing or emerging world. They are often small economies, which don’t have the resources to pay back loans.

"The G7 nations may be suffering, but the US or the UK will always be able to raise money in the debt markets."

Iceland is a typical example of a small economy that took on large amounts of loans before the credit crisis to fuel domestic expansion, making it the most indebted country in the world as it ran up debts of more than 10 times its gross domestic product.

The eastern European countries Hungary and Ukraine, along with the Baltic economies of Latvia, Lithuania and Estonia, are now in real danger of following Iceland into financial meltdown.

Ukraine and Hungary were forced this week to turn to the International Monetary Fund and the European Central Bank to help them deal with their difficulties in repaying foreign credits as the global crisis took a turn for the worse.

These countries have, like Iceland, borrowed heavily to fuel property and consumer spending booms and are now at the mercy of volatile equity markets that saw swings this week not seen for 20 years.

In Latin America, Argentina and Venezuela are facing growing difficulties as their debts mount and commodities prices, which both nations have relied on to pay bills in the past, fall. Argentina must service debts of $8bn (&128;5.95bn, £4.62bn) over the next year, which may prove to be extremely difficult if the debt markets remain closed.

In Asia, the crisis has enveloped Pakistan, which is haemorrhaging foreign exchange reserves to prop up its currency, amid a background of political instability that has undermined its economy.

Indonesia and South Korea are also exposed because of their reliance on foreign debt, while in South Africa a current account deficit of 8 per cent looks increasingly unsustainable.