What do Iceland and Pakistan have in common? Bankruptcy

Last week, Iceland nationalized its banking sector. The three big Icelandic banks (which had a remarkable footprint in Britain) spent the last decade taking out foreign loans in order to expand operations over seas. As the krona - the Icelandic currency - dropped as a result of the world-wide financial crisis, their debt burden skyrocketed, and they could no longer run basic operations. The state stepped in - only in turns out the national economy isn't big enough, let alone the state budget (from the telegraph) :

Iceland had also presided over the fastest expansion of a banking system anywhere in the world. Little did anyone know that the expansion once so admired would go on to saddle the country with liabilities in excess of $100 billion – liabilities that now dwarf its gross domestic product of $14 billion.

Given a population of 313,000, $100 billion means that each Icelander's share of that debt comes to $320 000. Unless international creditors are willing to accept payment in Bjork CDs and fermented shark meat, this isn't going to be paid off.

Perhaps to cheer up the Icelanders, Pakistan has also announced that it's nearing bankruptcy, lacking sufficient hard currency reserves to service its debt obligations. It looks like Musharraf picked a good time to retire as it is now up to his successor, Asif Ali Zardari, to take on the humiliating task of going from foreign capital to foreign capital, hat in hand, begging for a bailout (Saudi Arabia and China have already told him no). Both countries have been forced to come pleading to the IMF, which seems willing and able to provide a bailout, but under its notoriously draconian conditions - basically, no social spending or economic regulation allowed. Previous bailouts did restore countries to a respectable economic condition (in Latin American and Asia in the 80s and 90s) but at great social cost, but that was under generally favorable international economic conditions. What will happen given the global economic crisis is anybody's guess.

While Iceland's implosion will sadden fans of Mum and Noi Albinoi as well as readers of sagas everywhere, the economic collapse of Pakistan is more universally terrifying - an unstable Islamic country, with an active Taliban-linked insurgency (and a separatist movement) as well as a nuclear stockpile and an unresolved, bloody border dispute with India, the result might not be the well-behaved misery of South Korea after the financial crisis but instead a political environment more closely resembling Iraq in 2005 (and that's the optimistic scenario - the pessimistic one is Weimar Germany).