U.S. to get New Currency by June, 2012

When Jim Sinclair speaks, I listen. He is predicting a currency collapse or hyperinflationary event resulting in a new currency by June, 2012. I recommend reading his post and all the posts by Alf Field in their entirety:

A gift from Jim

Jim's comments on Alf Field's Gold Price Predictions

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Video: How Iceland Collapsed

How Iceland Collapsed

12/26/2008

WSJ's Andy Jordan examines how Iceland's economic miracle came to an abrupt end and explains why the world should care about the collapse of the small country's financial system.

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Social Unrest in Iceland, U.S.next?

When the dollar crashes look for scenes like this one to happen on U.S. soil...

A near-riot and parliament besieged: Iceland boiling mad at credit crunch

Published Date: 24 November 2008
By Omar Valdimarsson
Scotsman

in REYKJAVIK
THOUSANDS of Icelanders have demonstrated in Reykjavik to demand the resignation of Prime Minister Geir Haarde and Central Bank governor David Oddsson, for failing to stop the country's financial meltdown.

It was the latest in a series of protests in the capital since October's banking collapse crippled the island's economy. At least five people were injured and Hordur Torfason, a well-known singer in Iceland and the main organiser of the protests, said the protests would continue until the government stepped down.

As crowds gathered in the drizzle before the Althing, the Icelandic parliament, on Saturday, Mr Torfason said: "They don't have our trust and they are no longer legitimate."

The value of the Icelandic krona has been cut in half since January.

Four Nordic countries, as well as the International Monetary Fund (IMF), have pledged to lend the country a combined $4.6 billion to help revive its deflated economy. The loan would be the first by the IMF to a Western nation since 1976.

One young man climbed on to the balcony of the Althing building, where the president appears upon inauguration and on Iceland's national day, and hung a banner reading: "Iceland for Sale: $2,100,000,000" – the amount of the loan the country is getting from the IMF.

A separate group of 200-300 people gathered in front of the city's main police station, throwing eggs and demanding the release of a young protester being held there.

Police in riot gear used pepper spray to drive back an attempt to free the protester during which several windows at the police station were shattered. The pro-tester was later released after his fine was paid.

As daylight began to wane, demonstrators drifted away into the nearby coffee shops. Here, as currency tumbles, the price of a cup of coffee has shot up by about one-third since before the crisis struck.

The demonstrators accuse the government – elected last year – of not doing enough to regulate the banking industry and have called for early elections.

Iceland's next election is not required until 2011.

Opposition parties tabled a no-confidence motion in the government on Friday over its handling of the crisis, but the motion carries little chance of toppling the ruling coalition which has a solid parliamentary majority.

Gudrun Jonsdottir, a 36-year-old office worker, said: "I've just had enough of this whole thing. I don't trust the government, I don't trust the banks, I don't trust the political parties, and I don't trust the IMF.

"We had a good country and they ruined it."


BACKGROUND

ICELAND'S three biggest banks – Kaupthing, Landsbanki and Glitnir – collapsed under the weight of billions of dollars of debts accumulated in an aggressive overseas expansion, shattering the country's currency. Iceland's government seized control of all three institutions in early October.

This week, the North Atlantic island nation, which has a population of only 320,000, secured a package of more than US$10 billion (about £6.7 billion) in loans from the International Monetary Fund (IMF) and several European countries to help it rebuild its shattered financial system.

Despite the intervention, however, Iceland still faces a sharp economic slowdown and surging job losses while at least one-third of Icelanders are also at risk of losing their homes and life savings.

Geir Haarde, the Icelandic prime minister, has promised that the government will use the IMF money to bring back a flexible interest rate scheme and rewrite financial laws, particularly legislation relating to insolvency.

Iceland was the first country to ask the IMF for help as the turmoil in the credit markets in October hit home.

The UK government used anti-terrorism legislation to freeze money deposited by UK savers in Icelandic banks in order to ensure that their money was protected.

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U.S. to Borrow Record This Quarter to Finance Deficit

Iceland, here we come...

U.S. to Borrow Record This Quarter to Finance Deficit (Update1)

By Rebecca Christie and John Brinsley

Nov. 3 (Bloomberg) -- The U.S. Treasury more than tripled its planned debt sales for this quarter to help finance a 2009 budget deficit that bond dealers advising the department estimate may swell to almost $1 trillion.

Borrowing needs are expected to rise to $550 billion in the three months to Dec. 31, compared with the $142 billion predicted in July, the Treasury said in a statement in Washington. That follows a $530 billion record in the July-September quarter.

The worsening credit crisis and sluggish economy are straining the country's finances and will leave the winner of tomorrow's U.S. presidential election facing the worst budget shortfall on record next year. The Treasury is scheduled to announce in two days plans to expand debt sales to fund the gap.

``The U.S. Treasury faces an unprecedented financing need,'' said Goldman Sachs analyst Ed McKelvey, echoing a similar comment last week by Anthony Ryan, the Treasury's acting undersecretary for domestic finance.

The Treasury acknowledged the fiscal year 2009 deficit is likely to be far above the $482 billion projected in July, citing a new survey of its primary dealers. The financial firms told the Treasury they expect a $988 billion shortfall for the current fiscal year, which began Aug. 1.

The department didn't release its own estimate for the coming deficit, in keeping with its usual practice. The department did announce more than $1 trillion in borrowing that is taking place between July and December.

Quarterly Record

The quarterly borrowing figures announced today are each more than double the previous record -- $244 billion in new marketable debt in the first three months of this calendar year.

``Economic conditions have deteriorated notably over the past few months,'' Phillip Swagel, Treasury's assistant secretary for economic policy, said in a statement. ``It will take time for financial markets to stabilize and for credit market strains to ease.''

After improving for three straight years, the U.S. budget deficit deteriorated as a slowing economy hurt tax revenue and spending increased, reaching a record $455 billion shortfall in fiscal year 2008, which ended Sept. 30.

The Bush administration, which entered office in 2001 with a $127 billion budget surplus, in July predicted the next president faces a deficit totaling $482 billion in fiscal 2009. In early October, Congress passed a $700 billion bank rescue package that's draining federal coffers and leading some analysts to forecast a deficit of $1 trillion for this year.

Dealer Estimates

Dealers expect the Treasury to borrow $1.4 trillion in marketable debt during fiscal year 2008, with estimates spanning a range between $1.1 trillion and $2.1 trillion, according to the Treasury's survey results announced today.

At its quarterly refunding announcement Nov. 5, the Treasury is likely to announce $25 billion in three-year notes, $20 billion in 10-year notes and $8 billion in 30-year bonds for its next refunding cycle, according to the median forecast of six economists surveyed by Bloomberg News.

The Treasury sells a variety of bills and shorter-term notes to meet the rest of its financing needs.

Ryan said last week that the Treasury plans to increase the sizes of its bill, note and bond auctions, and he repeated that officials are considering additional sales of three-year notes and other longer-term debt.

Ryan's Speech

``Treasury may need to address many different policy objectives'' with its financing program, Ryan told the Securities Industry and Financial Markets Association Oct. 28.

McKelvey projects the Treasury's total 2009 borrowing needs at about $2 trillion.

The Treasury predicted three months ago it would borrow $171 billion in marketable debt in the July-to-September quarter and have a cash balance Sept. 30 of $45 billion. Today, the department said the actual amount it borrowed was $530 billion in the third quarter and the cash balance at the end of the period was $372 billion, including a supplementary financing program on behalf of the Federal Reserve.

At the end of the current quarter, the Treasury is predicting a cash balance of $300 billion. For the January-March period, the Treasury said it expects to borrow $368 billion, leaving a cash balance of $75 billion March 31.

Analysts said the Treasury's estimates don't account for an extension of its borrowing on behalf of the Fed.

``The actual borrowing could be much higher,'' said Louis Crandall, chief economist of Wrightson ICAP. ``The Treasury only projected its own borrowing. The programs the SFP is backing are authorized through next spring.''

Fed Program

For all of fiscal year 2008, which ended Sept. 30, the Treasury had a record net marketable borrowing of $760 billion, compared to $134 billion in 2007. For fiscal year 2008, the Fed redeemed $154 billion in U.S. government securities from its System Open Market Account, the Treasury said.

In July, the department estimated total marketable borrowing in fiscal 2008 would total $555 billion.

Before the Treasury's announcement, analysts were predicting more red ink in coming quarters.

Ward McCarthy of Stone & McCarthy Research Associates in New Jersey said he's expecting financing needs of $715 billion from October through December, followed by $320 billion in the January-March quarter. He predicted a $1.02 trillion 2009 deficit.

``All budget and financing projections should be considered to be fluid,'' he said.

Goldman Sachs projected $400 billion in borrowing needs for the final three months of 2008, followed by $375 billion for the first quarter next year. Those estimates don't, however, include borrowing for the Fed's supplementary financing program, which has already borrowed $220 billion since Oct. 1, Goldman Sachs economists said in a research note.

The Securities Industry and Financial Markets Association is projecting a $687.5 billion budget deficit for fiscal year 2009, according to a survey of its members released Oct. 31.

To contact the reporter on this story: John Brinsley in Washington at jbrinsley@bloomberg.net; Rebecca Christie at rchristie4@bloomberg.net.
Last Updated: November 3, 2008 16:10 EST

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Stunned Icelanders Struggle After Economy’s Fall

Can this happen in the U.S.? You bet!

November 9, 2008
Stunned Icelanders Struggle After Economy’s Fall
By SARAH LYALL
New York Times

REYKJAVIK, Iceland — The collapse came so fast it seemed unreal, impossible. One woman here compared it to being hit by a train. Another said she felt as if she were watching it through a window. Another said, “It feels like you’ve been put in a prison, and you don’t know what you did wrong.”

This country, as modern and sophisticated as it is geographically isolated, still seems to be in shock. But if the events of last month — the failure of Iceland’s banks; the plummeting of its currency; the first wave of layoffs; the loss of reputation abroad — felt like a bad dream, Iceland has now awakened to find that it is all coming true.

It is not as if Reykjavik, where about two-thirds of the country’s 300,000 people live, is filled with bread lines or homeless shanties or looters smashing store windows. But this city, until recently the center of one of the world’s fastest economic booms, is now the unhappy site of one of its great crashes. It is impossible to meet anyone here who has not been profoundly affected by the financial crisis.

Overnight, people lost their savings. Prices are soaring. Once-crowded restaurants are almost empty. Banks are rationing foreign currency, and companies are finding it dauntingly difficult to do business abroad. Inflation is at 16 percent and rising. People have stopped traveling overseas. The local currency, the krona, was 65 to the dollar a year ago; now it is 130. Companies are slashing salaries, reducing workers’ hours and, in some instances, embarking on mass layoffs.

“No country has ever crashed as quickly and as badly in peacetime,” said Jon Danielsson, an economist with the London School of Economics.

The loss goes beyond the personal, shattering a proud country’s sense of itself.

“Years ago, I would say that I was Icelandic and people might say, ‘Oh, where’s that?’ ” said Katrin Runolfsdottir, 49, who was fired from her secretarial job on Oct. 31. “That was fine. But now there’s this image of us being overspenders, thieves.”

Aldis Nordfjord, a 53-year-old architect, also lost her job last month. So did all 44 of her co-workers — everyone in the company except its owners. As many as 75 percent of Iceland’s private-sector architects have probably been fired in the past few weeks, she said.

In a strange way, she said, it is comforting to be one in a crowd. “Everyone is in the same situation,” she said. “If you can imagine, if only 10 out of 40 people had been fired, it would have been different; you would have felt, ‘Why me? Why not him?’ ”

Until last spring, Iceland’s economy seemed white-hot. It had the fourth-highest gross domestic product per capita in the world. Unemployment hovered between 0 and 1 percent (while forecasts for next spring are as high as 10 percent). A 2007 United Nations report measuring life expectancy, real per-capita income and educational levels identified Iceland as the world’s best country in which to live.

Emboldened by the strong krona, once-frugal Icelanders took regular shopping weekends in Europe, bought fancy cars and built bigger houses paid for with low-interest loans in foreign currencies.

Like the Vikings of old, Icelandic bankers were roaming the world and aggressively seizing business, pumping debt into a soufflé of a system. The banks are the ones that cannot repay tens of billions of dollars in foreign debt, and “they’re the ones who ruined our reputation,” said Adalheidur Hedinsdottir, who runs a small chain of coffee shops called Kaffitar and sells coffee wholesale to stores.

There was so much work, employers had to import workers from abroad. Ms. Nordfjord, the architect, worked so much overtime last year that she doubled her salary. She was featured on a Swedish radio program as an expert on Iceland’s extraordinary building boom.

Two months ago, her company canceled all overtime. Two weeks ago, it acknowledged that work was slowing. But it promised that there would be enough to last through next summer.

The next day, everyone was herded into a conference room and fired.

Employers are hurting just as much as employees. Ms. Hedinsdottir has laid off seven part-time employees, cut full-time workers’ hours and raised prices. The Kaffitar branch on Reykjavik’s central shopping street was perhaps half full; in normal times, it would have been bursting at its seams.

While business is dwindling, costs are soaring. When the government took over the country’s failing banks in October, Ms. Hedinsdottir’s latest shipment of coffee — more than 109,000 pounds — was already on the water, en route from Nicaragua. She had the money to pay for it, but because the crisis made foreign banks leery of doing business with Iceland, she said, she was unable to convert enough cash into foreign currency.

“They were calling me every day and asking me what the situation was, and they got really nervous,” Ms. Hedinsdottir said of her creditors. They got so nervous that they sent the coffee to a warehouse in Hamburg, Germany, where it now sits while she tries to find the foreign currency to pay for it.

Her fixed costs are no longer fixed. Five years ago, the company built a new factory, borrowing the 120 million kronur — about $1.5 million — in foreign currencies. But the currency’s fall has increased her debt to 200 million kronur. This summer, her monthly payments were 2.5 million kronur; now they may be double that — the equivalent of $38,500 in Iceland’s debased currency.

“My financial manager is talking to the banks every day, and we don’t know how much we’re supposed to pay,” Ms. Hedinsdottir said.

In a recent survey, one-third of Icelanders said they would consider emigrating. Foreigners are already abandoning Iceland.

Anthony Restivo, an American who worked this fall for a potato farm in eastern Iceland and was heading home, said all of the farm’s foreign workers abruptly left last month because their salaries had fallen so much. One man arrived from Poland, he said, then realized how little the krona was worth and went home the next day.

At the Kringlan shopping center on the edge of Reykjavik, Hronn Helgadottir, who works at the Aveda beauty store, said she could no longer afford to travel abroad. But the previous weekend, she said, she and her husband had gone for a last trip to Amsterdam, a holiday they had paid for months ago, when the krona was still strong.

They ate as cheaply as they could and bought nothing. “It was strange to stand in a store and look at a bag or a pair of shoes and see that they cost 100,000 kronur, when last year they cost only 40,000,” she said.

In Kopavogur, a suburb of Reykjavik, Ms. Runolfsdottir, the recently fired secretary, said she had worried for some time that Iceland would collapse under the weight of inflated expectations.

“If you drive through Reykjavik, you see all these new houses, and I’ve been thinking for the longest time, ‘Where are we going to get people to live in all these homes?’” she said.

The real estate firm that used to employ Ms. Runolfsdottir built about 800 houses two years ago, she said; only 40 percent have been sold.

By Icelandic law, Ms. Runolfsdottir and other fired employees have three months before they have to leave their jobs. At the end of that period, she will start drawing unemployment benefits.

Meanwhile, her husband’s modest investment in several now-failed Icelandic banks is worthless. “They were encouraging us to buy shares in their firms until the last minute,” she said.

She feels angry at the government, which in her view has mishandled everything, and angry at the banks that have tarnished Iceland’s reputation. And while she has every sympathy with the hundreds of thousands of foreign depositors who may have lost their money, she wonders why the Icelandic government — and, in essence, the Icelandic people — should have to suffer more than they already have.

“We didn’t ask anyone to put their money in the banks,” she said. “These are private companies and private banks, and they went abroad and did business there.”

Despite all this, Icelanders are naturally optimistic, a trait born, perhaps, of living in one of the world’s most punishing landscapes and depending for so much of their history on the fickle fishing industry. The weak krona will make exports more attractive, they point out. Also, Iceland has a highly educated, young and flexible population, and has triumphed after hardship before.

Ragna Sara Jonsdottir, who runs a small business consultancy, said she had met for the first time with other businesses in her office building. “We sat down and said, ‘We all have ideas, and we can help each other through difficult times,’ ” she said.

But she said she was just as shocked as everyone else by the suddenness, and the severity, of the downturn. When the prime minister, Geir H. Haarde, addressed the nation at the beginning of October, she said, her 6-year-old daughter asked her to explain what he had said.

She answered that there was a crisis, but that the prime minister had not told the country how the government planned to address it. Her daughter said, “Maybe he didn’t know what to say.”

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What Happens when Countries Go Bankrupt?

Barter will happen first and then Gold & Silver will arise as the new Medium of Exchange:

From Spiegal Online:

THE GHOST OF ARGENTINA
What Happens when Countries Go Bankrupt?

By SPIEGEL Staff

First it was mortgage lenders. Then large banks began to wobble. Now, entire countries, including Ukraine and Pakistan, are facing financial ruin. The International Monetary Fund is there to help, but its pockets are only so deep.

No, Alexander Lukyanchenko told reporters at a hastily convened press conference last Tuesday, there is "no reason whatsoever to spread panic." Anyone who was caught trying to throw people out into the street, he warned, would have the authorities to deal with.

Lukyanchenko is the mayor of Donetsk, a city in eastern Ukraine with a population of a little more than one million. For generations, the residents of Donetsk have earned a living in the surrounding coalmines and steel mills, a rather profitable industry in the recent past. Donetsksta, a local steel producer, earned €1.3 billion ($1.65 billion) in revenues last year.

But last Tuesday the mayor, returning from a meeting with business leaders, had bad news: two-thousand metalworkers would have to be furloughed. Lukyanchenko doesn't use the word furlough, instead noting that the workers will be doing "other, similar work." But every other blast furnace has already been shut down, and one of the city's largest holding companies is apparently gearing up for mass layoffs.

Under these conditions, how could panic not be rampant in Donetsk, the capital of Ukraine's industrial heartland? In Mariupol, a steelworking city, a third of the workers have already been let go. The chemical industry, Ukraine's second-largest source of export revenue, is also ailing. In the capital Kiev, booming until recently, construction cranes are at a standstill while crowds jostle in front of currency exchange offices, eager to convert their assets into US dollars.

Donetsk is in eastern Ukraine, 8,100 kilometers (5,030 miles) from New York's Wall Street and 2,700 kilometers (1,677 miles) from Canary Wharf, London's financial center. But such distances are now relative. The world financial crisis has reached a new level. No longer limited to banks and companies, it is now spreading like wildfire and engulfing entire economies. It has reached Asia and Latin America, Eastern Europe, Iceland the Seychelles, the Balkan nation of Serbia and Africa's southernmost country, South Africa.

It is a development that has investors and speculators alike holding their breath. Some are pulling their money out of troubled countries, while others are betting on a continued decline -- and in doing so are only accelerating the downturn. Central banks are desperately trying to halt the downward trend, but in many cases the plunge seems unstoppable.

At first, it seemed as if the crash could be limited to Iceland. But now countries like Ukraine, Pakistan and Argentina are proving to be almost as vulnerable as the small island nation in the North Atlantic. It seems as though another country is added to the growing list of nations on the verge of collapse almost daily.

A national bankruptcy isn't just some theoretical construct. Argentina experienced it in 2001 and Russia three years earlier. Germany has gone bankrupt twice in its more recent history, once in 1923 and the second time after 1945. A country has reached this final stage if, as a result of war or blatant mismanagement, it has gambled away all trust, can no longer service its debt or convince anyone to lend it any money, no matter how high an interest rate it promises to pay.

This is what is currently happening to Iceland. The central bank in the capital Reykjavik increased its prime rate by six points to 18 percent last week. Venezuela, where inflation is also high, is now offering 20 percent to stimulate interest in its government bonds. At the moment, however, investors are shying away from all risk.

In the end, the rating agencies will have no choice but to downgrade the problem countries to their lowest level of creditworthiness. When that happens, lenders will have no choice but to write off much of their money. For citizens, national bankruptcy would probably lead to massive inflation.

The threshold countries, described until recently as "emerging" economies, are in for an especially rough ride. "The dream that they would be spared seems to have come to an end," says Rolf Langhammer, vice-president of the Kiel Institute for the World Economy.

Countries like Russia and Brazil owe their recent success in large part to the boom in commodities the world has experienced in recent years. But now prices for oil, copper, wheat and corn have plunged and a giant spiral of debt has begun to turn. The companies and banks that borrowed vast amounts of money abroad for their investments can no longer service their debt, and investors are pulling out their capital. As foreign currency becomes scarce and imports unaffordable, the currencies of these countries are losing value, which only increases the mountain of debt.

According to Stephen Jen, a currency specialist with the US bank Morgan Stanley, the flow of capital to threshold countries could drop by more than half -- from the current level of €575 billion ($730 billion) to €230-270 billion ($292-343 billion) -- if world economic growth drops to only 1 percent in 2009. The demise of these countries, says Jen, represents the new "epicenter of the global crisis."

The looming crisis has the countries in most dire need lining up for emergency loans from the International Monetary Fund (IMF). But all they are doing is buying time -- a few weeks, or perhaps even months -- and hoping that the general situation will soon improve.

The Ghost of Buenos Aires

The signs of looming national bankruptcy are plentiful, and bankers in the Uruguayan capital of Montevideo know them well. In late 2001, they were the first to see the coming crash in Argentina. Men traveled across the Rio de la Plata, from Buenos Aires to Montevideo, carrying suitcases filled with US dollars. They stood in long lines at the city's banks, depositing the contents of their suitcases into accounts and safe deposit boxes there. Uruguay is South America's Switzerland, a safe haven for money in times of crisis. No one asks about where the millions come from.

Argentina in crisis.
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Argentina in crisis.
Once the Argentine businessmen had transferred their dollars abroad, the second phase of the collapse began. The Argentine government froze all bank accounts, capping the maximum amount an accountholder could withdraw at only $250 (€198) a week. Small investors, those who had left their money in the banks, were the hardest hit. Tens of thousands of desperate citizens stormed the banks, and many spent nights sleeping in front of the automated teller machines.

The last phase of the downturn began in the Buenos Aires suburbs. After consumption had dropped by 60 percent, young men began looting supermarkets. In December 2001, 40,000 people gathered on Plaza de Mayo in front of the Casa Rosada, the presidential palace. There, they banged pots and pans together day and night, until an unnerved President Fernando de la Rúa fled by helicopter.

The image of the fleeing president has burned itself into the collective memory of Argentineans. It marks the worst financial crisis of the last 100 years. De la Rúa's successor allowed the peso to float free on the world currency-exchange markets after it had been pegged to the US dollar at a ratio of 1:1. Tens of thousands of small business owners, who had incurred debt when the peso was still pegged to the dollar, filed for bankruptcy. Unemployment quickly ballooned to 25 percent.

Five presidents passed through the Casa Rosada in the space of two weeks, until Nestor Kirchner, a provincial governor until then, assumed the presidency in 2003. Kirchner informed the country's international creditors that Argentina would not be able to repay its $145 billion (€115 billion) in foreign debt.

Is history repeating itself today?

Economic experts have been warning for months that Argentina is again heading toward national bankruptcy. Men are traveling to Uruguay once again with suitcases filled with cash. In the space of only three weeks, more than $700 million (€553 million) was withdrawn from Argentine bank accounts. Government bonds have lost more than half of their value. ATMs are no longer giving out more than 300 pesos, and inflation is running rampant.

Bailing Out a Sinking Ship with a Bowl

And the sound of pots and pans being banged together is back. President Cristina Fernandez, who succeeded her husband Nestor Kirchner in 2007, increasingly resembles the hapless de la Rúa. Last week, she presented her version of the "Corralito" -- the term used to describe the freezing of bank accounts in 2001 -- when she ordered the nationalization of private pension funds, allegedly to prevent the funds from going bankrupt.

But economic experts believed that Fernandez's true objective in nationalizing the private deposits, which are worth $30 billion (€24 billion), is to avert a government bankruptcy. Columnist Mario Grondona criticized the president, likening her to "a captain trying to save a sinking ship by bailing it out with a bowl from the kitchen."

Her husband was more decisive. He defied the IMF, which has sought to impose drastic rules on the country. He alienated international creditors by offering to buy back government bonds for only 25 percent of their face value. Since then, Argentina has received almost no new loans in the global financial marketplace.

Nevertheless, the country recovered from the crash with astonishing speed. In recent years, the Argentine economy has grown at impressive rates of 7 to 9 percent. At the first signs of the impending end of the boom, Venezuelan President Hugo Chavez came to the country's rescue by buying up Argentine bonds. But now the authoritarian Venezuelan leader can no longer serve as Argentina's savior. With oil prices sharply in decline, Venezuela itself is seen as yet another candidate for economic disaster.

This has prompted President Fernandez to discreetly seek rapprochement with the hated IMF and the Club de Paris, a group of lending nations made up of some of the world's richest countries, in an attempt to reconnect Argentina to the international lending cycle.

The European Union's Achilles Heel

Hungary is another country being hit hard by the financial crisis. Until recently, the Hungarian government would not have dreamed it would be forced to accept aid from the IMF. But in recent days Hungary barely avoided sliding into national bankruptcy, and only a €12.5 billion ($15.9 billion) IMF rescue package -- bolstered by billions more from the European Union and the World Bank -- prevented it from happening.

The collapse of the forint.
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The collapse of the forint.
The incident has historic significance. Hungary is the first country in the European Union obliged to accept an IMF loan of this nature. The conservative newspaper Magyar Nemzet writes that the move will turn Hungary into the "only colony of the International Monetary Fund" within the EU. The opposition party calls the plan "a disgrace." Brussels's contribution was €6.5 billion ($8.26 billion), while the World Bank contributed another €1 billion ($1.27 billion). The measures represent the most comprehensive international rescue package assembled in the current financial crisis.

How could this have happened, an EU member finding itself in such difficulties?

Much of the blame for Hungary's current debacle lies with the failings of the past. The once-successful nation of 10 million people lived beyond its means for years. With government finances spinning out of control, the national debt ballooned to two-thirds of the country's GDP. "The funding for our excessively high standard of living came from other countries," admits András Simor, the governor of the central bank, not without a dose of self-criticism.

The Hungarians have always been considered shopaholics. Hundreds of thousands bought themselves big cars and went on shopping sprees in the chic boutiques on Váci Utca in Budapest -- all on credit. The real estate market boomed, turning close to 90 percent of Hungarian apartments are privately owned. Most mortgage loans were denominated in euros and Swiss francs. But that practice has taken its toll. As the Hungarian forint plunges in value, mortgage holders are suddenly paying astronomical interest rates. It was primarily this dependency on other countries that has fueled the crisis in Hungary. Ironically, Budapest was once seen as a role model for other countries seeking EU membership. But instead of following in the footsteps of the Czech Republic and Slovakia, and introducing structural reforms after the collapse of communism, the Hungarians kept growing their national debt. A few days before the runoff vote in the 2002 parliamentary election, the conservative government of then Prime Minister Viktor Orban increased pensions by a substantial amount. Orban's successor, Peter Medgyessy, a socialist, introduced a 50 percent salary hike for teachers and healthcare workers.

The current premier, Ferenc Gyurcsány, also chose borrowing as his preferred method, at least initially. Only when the planned introduction of the euro threatened to become a more distant possibility for his country did Gyurcsány change course and encourage saving, at least to the extent possible. The opposition fought against the necessary reforms with missionary zeal. A referendum eventually broke the deadlock, and Gyurcsány was forced to put his savings plans on ice.

Nevertheless, the socialist was able to celebrate a few modest successes. The country's public deficit was brought down from more than 9 percent of gross domestic product in 2006 to about 3 percent more recently. But this was still not enough to help the country withstand the tremors of the financial crisis. "Before we were able to reach a safe harbor," says central bank Governor Simor, "the hurricane caught up with United States"

After receiving international credit assurances, neighboring Austria can finally breathe a sigh of relief. Its financial institutions, including Erste Bank, the Raiffeisen savings bank and Austria-Creditanstalt, have a strong presence in Hungary, where they control 22 percent of the banking sector. These days, it is quite possible that a crisis in small countries could end up pulling larger ones into its vortex.

Ukrainian Crash

Further east, the Ukrainian Central Bank last Thursday set the official exchange for the country's currency at 5.70 hryvna per US dollar. But its effort was in vain. By noon, currency traders in Odessa were already charging 9 hryvna for a dollar, until they were forced to close when their supply of greenbacks ran out. Ukrainians with rents to pay in dollars -- a common practice in many parts of the country -- suddenly faced the prospect that they couldn't pay their landlords come Nov. 1.

Problems in Ukraine.
DER SPIEGEL

Problems in Ukraine.
Europeans are familiar with the constant trouble between Yulia Tymoshenko, the prime minister, and President Viktor Yushchenko, her curmudgeonly rival. But it is less well known that Ukraine was in a better economic position than Hungary until recently.

Massive amounts of foreign capital began flowing into the country in 2007. The Ukrainian market was attractive and brought in unexpectedly large investments. At the same time, the price of steel, Ukraine's top export, was ballooning on the world market. The price of a ton of steel in July, €189 ($240), was already €55 ($70) higher than at the beginning of the year.

After the government had forecast 6.5 percent GDP growth, the precipitous drop in Ukraine's economy came as a shock to Kiev's political elite, especially in a country that was barely integrated into the global financial system. Ukraine was in a "state of euphoria," and yet it was unable to cope with the massive influx of capital, say the Eastern Europe specialists at the University of Bremen. Pensions and wages were raised, in some cases savings accounts lost at the end of the Soviet era were replaced and banks issued loans without examining their borrowers' creditworthiness. This stimulated consumption, with consumers increasingly spending their newfound riches on imports. But then the price of steel plummeted.

Could the IMF Run Out of Money?

In only one year, the foreign debt rose from €27 billion ($34.3 billion) to €78 billion ($99 billion), of which €23 billion ($29 billion) is due by the end of 2009. But Kiev is no longer receiving any loans from abroad, while Ukrainians are withdrawing their savings from domestic banks to the greatest extent possible.

Europe's largest nation is a textbook example of how an economic cycle can collapse in only a few months. The Ukraine specialists in Bremen assume that the country could face "a deep national crisis" in 2009, the "consequences of which are difficult to predict."

A vicious circle has already been put in place, now that steel mills are cancelling their coal orders. The coals mines, most of which survive on loans, can no longer pay the utilities, which in turn are shutting off the power supply. Winter is around the corner and Kiev has not yet reached a definitive agreement with Moscow over natural gas prices. Indeed, Moscow could be tempted, once again, to take advantage of the plight of its reviled neighbor.

It is "like a tornado" that increases in strength every day, says one industry leader. Some are already calling for a return of the barter economy, an antiquated system of trading among companies, which was implemented in the early 1990s when money was scarce. "It would be like turning away from the market economy," warns former President Leonid Kravchuk.

The head of the Ukrainian central bank characterizes the €13 billion ($16.5 billion) that the IMF is now providing as "technical bankruptcy." But the IMF is also attaching conditions to its bailout for Ukraine. They include a freeze on social services, increasing natural gas prices, privatizing government-owned businesses and eliminating subsidies.

Last week, the Ukrainian parliament held a heated debate over a crisis program. But the president and the prime minister did what they have been doing for months, taking advantage of the crisis to continue their duel. Tymoshenko, with her populist politics, is to blame for the plight, Yushchenko complained. Tymoshenko promptly responded by calling the president's decision to schedule new elections now "criminal."

Ukraine never fulfilled obligations, warns one of the country's former leading economists. In an article titled "Kiev's Crackup," the Wall Street Journal writes that Ukraine's only hope for success is to find new political leaders.

Concerns of a Pakistani Meltdown

Thousands of miles away last Wednesday, a powerful earthquake struck in Pakistan, killing about 300 people in poverty-stricken Beluchistan Province. It was yet another blow to country whose troubles are myriad and serious. The nuclear-armed country has been plagued by suicide bombings, corruption scandals and radical Islamists -- and now by the financial crisis.

The rupee plummets.
DER SPIEGEL

The rupee plummets.
On the day before the quake, German Foreign Minister Frank-Walter Steinmeier was in Pakistan, on a visit that signaled Islamabad's importance for the West. Although Pakistan does not occupy a key position in the global financial system, the fear that this country, of all places, could collapse sends a cold shiver down the spines of observers.

Last Tuesday, according to reports, there were only two to three weeks separating Pakistan, a nation of 165 million, from bankruptcy. Pakistan, says Steinmeier, "was hit hard." He supports an immediate IMF loan to Pakistan to the tune of several billion euros.

Islamabad's economy has been in a free fall for months. Skyrocketing prices for oil and food drove up the inflation rate, while ongoing terrorist attacks by Islamist extremists drove away investors. Few doubt that the current situation could lead to anarchy in Pakistan, a country already under stress from numerous forces. If the government fails completely, the consequences will be more serious that in other nation threatened by the financial crisis.

In speeches to business leaders in Lahore and Karachi Shaukat Tarin, a former banker at Citibank and the current financial advisor to Pakistan's prime minister, promised an entire package of measures. But without money they are not feasible. They include government subsidies for agriculture, expansion of the energy sector to do away with the country's chronic power outages and simplification of the tax system.

In addition, President Asif Ali Zardari is proposing a program he calls the "Benazir Card," named after his murdered wife Benazir Bhutto, which would entitle seven million needy citizens to monthly welfare benefits. Poverty is a mounting problem in Pakistan, where inflation is at 25 percent and a budget deficit and shortage of currency reserves have led to significant subsidy cuts and growing hunger.

Quick action is needed. It would be catastrophic were the unity of Pakistan threatened -- a unity already fragile given the lack of authority the government and its representatives has in many tribal regions. An estimated €11.5 billion ($14.6 billion) in aid will be needed for the next two years, although Shaukat Tarin puts that number at only €2.3 billion ($2.9 billion). Commitments so far, however, include only €1 billion ($1.27 billion) from the World Bank and the Asian Development Bank. Now that China has only offered to build two nuclear power plants, instead of contributing a hoped-for $1 billion (€790 million) financial injection, the only remaining big spender is the unpopular IMF.

An IMF loan would be tied to savings requirements, but these would not necessarily apply to the defense budget. The army is the only stabilizing force in the country. Weakening it would not be helpful in the war on terror.

Pakistan's military has already put a stop to the construction of its €160 million ($203 million) new headquarters in Islamabad. But irking the keepers of the country's nuclear bombs with additional savings requirements would be dangerous. The West's greatest concern is that Pakistan's nuclear arsenal (an estimated 60 warheads and 70 delivery missiles) could end up in the wrong hands.

Only foreign capital can prevent more and more of the poor seeking their salvation among the radical mullahs. Pakistan cannot be allowed to become insolvent, and for this reason the IMF's offer of assistance is inescapable. Indeed, there is already evidence of improvement for Pakistan. In two weeks, a group called Friends of Democratic Pakistan, which includes the United States, the EU, Japan and a few Gulf nations, will meet in Abu Dhabi. And now that the German foreign minister paid a visit to Saudi Arabia last week, the wealthy oil-producing nation is also on board. Steinmeier had urged the hesitant Saudi king to take part in the Pakistan rescue program, apparently with success.

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.

Can the IMF afford to help?
DER SPIEGEL

Can the IMF afford to help?
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.

By Beat Balzli, Rüdiger Falksohn, Jens Glüsing, Alexander Jung, Marion Kraske and Christian Neef

Translated from the German by Christopher Sultan