Bancherul - BANCI / Analiza / The credit crisis has hit Iceland. Who is next in line? There are a lot of candidates in the Emerging Markets

The global credit crisis is now spreading to the most leveraged economies in the world, indicates a study of Danske Bank (see the document attached).

Iceland was the first economy to fall victim to the global credit crisis and it now looks like the International Monetary Fund (IMF) will have to be called in to help Iceland recover from the country�s worst financial and economic crisis ever. But it is not only Iceland that seems to be in need of a helping hand from the IMF.

This week first Hungary was offered �technical and financial� support from the IMF and then the Ukraine later also asked for assistance. It is still unclear what role the IMF will play in resolving the economic and financial crisis in the three countries, but there is no doubt that the global credit crunch has triggered renewed focus on the IMF�s role in international crisis management.

What do Iceland, Hungary and the Ukraine have in common? All three countries are struggling and have seen strong credit growth, increased reliance on foreign funding, and asset market bubbles in recent years. This makes these countries especially fragile in the present global financial environment. With the ongoing significant deleveraging of the global economy the most leveraged economy is coming under increasing pressures and this is what has created the need for IMF assistance in Iceland, Hungary and the Ukraine. However, it is not only these three countries that are under pressure in the present environment and judging from the development in credit default swaps (CDS) other countries might soon have to ask for assistance from the IMF.

Over the past month CDSs have spiked in a number of mostly Emerging Markets indicating a significant increase in worries over funding problems in these countries on the back of the intensified credit crisis. The rise in CDS spreads has been the strongest in Argentina, Pakistan and Iceland. In the graph above we show the 20 countries that have seen the strongest rise in CDS spreads over the past month.

It is striking that that most of the countries in the �top 20� are countries that are either running large current account deficits � like Iceland, the Baltic States, Romania and Bulgaria � and/or countries that in recent years have had very strong credit growth. It is also notable that a number of commodity exporters are now in the �top 20� � most notably Argentina and Venezuela.

These countries have benefitted from rising commodity prices in recent years, but have failed to use the good years to save for bad years. Hence, since the commodity prices peaked in July CDS spreads have increased significantly in a number of commodity exporting countries. It is also notable that among the �top 20� countries there are a number of countries that in recent years have seen increased domestic and geopolitical uncertainty � here special attention in this regard should be given to Pakistan, Thailand, Ukraine and Russia.

Looking at the global map it is clear that a significant number of the countries in the �top 20� are EMEA countries � whether we talk about Iceland, Latvia or South Africa. Hence, out the 20 countries that have seen the largest rise in CDS spreads, 13 are from the EMEA. LATAM is the second most �fragile� region with four countries in the �top 20�. Asia is still rightly, in our view, being perceived as the safe haven in Emerging Markets. Only three Asian countries are in the �top 20�.

As IMF is entering into dialogue with Iceland, Hungary and the Ukraine it is likely that the IMF�s staffs in Washington DC are drawing up a travelling schedule for future missions. We suggest the IMF take a look at the �top 20� for the travel plan.