Imagine the following scenario: In a medium-sized European country—call it Country X—the bank regulators hold an ordinary meeting. These being extraordinary times, the regulators discuss the health of various banks, including the country's largest—call it Bank Y—which is owned by an even larger Italian financial group. Last spring, Bank Y, which is perfectly healthy, transferred a large amount of money to its now somewhat-less-healthy Italian parent. Since this was nothing unusual, the regulators drop the subject and move on.
On the following day, that conversation is reported in a marginal, far-right newspaper in somewhat different terms: "$1 billion transferred to Italy! Country X's hard-earned money going abroad!" Within hours, as if on cue, everyone starts selling shares in Bank Y, whose stock price plunges. So does the rest of Country X's smallish stock market. So does Country X's currency. Within a few more hours, Country X is calling for an international bailout, the International Monetary Fund is on the phone, and the government is wobbling.
Except for that final sentence—there was no international bailout or IMF call, and the government is fine—that is a brief description of something that really happened last week to one of Poland's largest banks. A real meeting, followed by an unsubstantiated rumor in a dodgy newspaper, and a bunch of nervous investors started selling. Shares in the bank collapsed by the largest margin in its history; for one ugly day, they dragged down the rest of the Polish stock market and currency, as well.
As I say, the story ended there. But it could have gone further, and, indeed, in several other countries it already has. A month ago, in the first round of this crisis, panicky rumors brought down banks. Now, with trillions of nervous dollars sloshing around the international markets, panicky rumors are bringing down countries.
The case of Iceland, which in recent weeks has nationalized its three major banks, shut its stock exchange, and halted trading in its currency, is by now well-known. Less well-known is the speed with which the Icelandic disease is now spreading. Consider Hungary, once the destination of choice for investors who wanted an East European head office with a 19th-century façade and a pastry shop next door: The currency is in free fall and so is the stock market, flummoxing those previously well-fed investors. (One of them told a Hungarian financial Web site, "I haven't got a clue as to when and how this would end, I'm just staring into empty space.") Or take Ukraine, where the governor of the central bank declared his banking system "normal and reliable" on Monday of last week. By Tuesday, Ukraine had desperately requested "systemic support" from the IMF.
So far, most of these crises have been explained away. The banks of Iceland had debts larger than Iceland's GDP; Hungary's finances were long mismanaged; and Ukraine, where the president just called for the third election in as many years, is badly governed. But the speed with which some of these defaults are happening, coupled with the paranoia naturally inherent in the political culture of small countries, has led many to suspect political manipulation.
To put it differently: If you wanted to destabilize a country, wouldn't this be an excellent time to do it? If Country X's stock market can crash following the publication of a single article in an obscure newspaper, think what might happen if someone conducted a systematic campaign against Country X! And if you can imagine this, so can others.
All governments have enemies, internal and external, or at least opponents who do not wish them well: the political opposition, the country next door, the former imperial power. For some, the temptation to bring down the government, destabilize the country, and thus create political chaos will always be there. Even when there hasn't been political meddling, some people will suspect it anyway. Here, then, is a prediction: Political instability will follow economic instability like night follows day. Iceland is no longer alone. Serbia, the Baltic states, Kazakhstan, Indonesia, South Korea, and Argentina are all in financial trouble; so, too, are Russia and Brazil.
And here's a final, unpleasant thought: Pakistan. This is a country with 25 percent inflation and a currency in free fall, a country with a jihadist insurgency on its Afghan border, permanent hostility on its Indian border, nuclear weapons, and a tradition of street demonstrations in response to suspicious newspaper articles. Last week, angry investors pelted the Karachi exchange with stones. Dozens of people, with all kinds of agendas, have an interest in using financial markets to destabilize Pakistan, and Afghanistan along with it. Eventually, one of them will.