We have seen banks go bust. And it could be a matter of time before a few countries go bankrupt as well. The two most likely candidates right now are Iceland and Pakistan.
With some eerie timing, the International Monetary Fund has recently put out a research paper on the costs of such sovereign defaults. Though this research does not reflect IMF’s official view of the matter, it does tell us some important things.
There are three economic costs—to reputation, trade and the financial system of that country. And there is also a fourth cost: political. These can be “dire” for the incumbent government and its leaders. Their survival is at stake.
Political tremors can also be felt in the neighbourhood. Iceland has unsettled its European neighbours by asking Russia for a bailout, rather than the European Union or IMF.
It is worth speculating now what a Pakistan default might politically mean for India. There is already some reason to believe that Asif Ali Zardari is trying to win brownie points, as when he rightly called the fighters in Kashmir terrorists. So, here’s a hypothetical question: Would India be ready to play Russia to Pakistan’s Iceland?