Pakistan Faces Bankruptcy, Wants $100bn Handout

By Cernig

The UK's Daily Telegraph reports that Pakistan may be the first nation to go bankrupt as a result of the continuing global financial meltdown.

Officially, the central bank holds $8.14 billion (£4.65 billion) of foreign currency, but if forward liabilities are included, the real reserves may be only $3 billion - enough to buy about 30 days of imports like oil and food.

Nine months ago, Pakistan had $16 bn in the coffers.

The government is engulfed by crises left behind by Pervez Musharraf, the military ruler who resigned the presidency in August. High oil prices have combined with endemic corruption and mismanagement to inflict huge damage on the economy.

Given the country's standing as a frontline state in the US-led "war on terrorism", the economic crisis has profound consequences. Pakistan already faces worsening security as the army clashes with militants in the lawless Tribal Areas on the north-west frontier with Afghanistan.

... Mr Zardari told the Wall Street Journal that Pakistan needed a bail out worth $100 billion from the international community.

"If I can't pay my own oil bill, how am I going to increase my police?" he asked. "The oil companies are asking me to pay $135 [per barrel] of oil and at the same time they want me to keep the world peaceful and Pakistan peaceful."

The ratings agency Standard and Poor's has given Pakistan's sovereign debt a grade of CCC +, which stands only a few notches above the default level.

The economic crisis might yet end Pakistan's newly elected government, which is facing a crisis of confidence already as it battles 25% inflation, a drowning currency and a President with a reputation as "Mr 10%" for past corruption. It's also unclear that even a $100 billion bailout would be enough to stave off Pakistan's money woes, since the security situation is itself feeding the economic crisis there - investors don't want to know about a nation so obviously on the verge of failure.

Nor is it certain that even the US and Western allies will care to throw such a large sum of money into Pakistan. Sure, they could probably secure protestations of working harder to enact economic reforms after the mismanagement of the Musharraf years and to more strongly pursue the War on Terror, but what would those promises be worth? The question "whose side is Pakistan on?" is being asked in NATO circles nowadays, and more are coming to the conclusion that the Pakistani feudal elite are content to play the West for all it is worth while caring precious little for their own people's fate. Then again, Pakistan has nukes and the prospect of a truly failed state there is a terrible one to contemplate.

As usual with that nation, the situation is a Gordian Knot created by decades (dating back at least to Reagan and the Russian invasion of Afghanistan) of local and Western leaders ignoring very real problems. It's a knot with no easy, or short-term, solution. It will take decades of strategic containment, careful stick and carrots, law enforcement outwith Pakistan to catch the terrorists it gives safe haven to and some simple truth-telling to roll all that back. There are no fixes with a timeline of less than decades.

And, as John Robb at Global Guerrillas writes, don't expect Pakistan to be the last nation to find itself on the financial brink.

The global financial system is much LARGER, FASTER, and COMPLEX than the nation-states that are trying to bail them out. As a result, nation-state intervention won't return things to the status quo. What it will do, however, is tightly couple western nation-states to the now inevitable failure in the financial system (this is akin to lashing a dingy to the Titanic to prevent it from sinking). The rampant proliferation of bankrupt and hollow states is now likely inevitable.

If you've a good idea on where to go from here, you're doing one better than national leaders across the globe.

Comments

[Curmudgeon]

Regarding Pakistan, to what extent can anyone be sure that Zardari isn't engaging in a little blackmail? Never underestimate the cunning of a kleptocrat determined to line his own pockets by exploiting a crisis.

Regarding the financial mess, there is not a shortage of ideas on how to defang the financial system. The real problem is that financial firms have captured control of key governments to the extent that the creation of even modest safeguards is off the table.

If genuine reform was on the table, then there are ways forward that greatly reduce the risk of chain reaction failures and forced public bailouts of non-depository institutions. One way would be to fracture the financial industry into hundreds of small players each limited by law from growing to the point that its failure would cause a chain reaction. If a company is too big to fail--much less too big to bail out--it should be too big to exist. Another path would be sectoral investment limits whereby firms would be legally restricted to taking market positions that could theoretically bankrupt the firm in a handful of economic sectors at a time. Positions in other sectors would be required to be small enough that the worst theoretical loss would not result in firm failure. Both of these options would trade off growth for stability by preventing bad management or bad luck in one area from taking down unrelated parts of the economy. Think of the many small companies approach as 'resilient communities' for the financial markets.

Of course, this is merely a thought experiment as there is no realistic chance of bringing about meaningful reform to the financial system. States have created a transnational monster that is able to resist or evade all efforts at state control by exploiting jurisdiction shopping, capture of critical governments, or waging economic warfare through financial blackmail.

[Disco]

Ever since they split India to make Pakistan they hav'nt even progressed any further from those days.

They still use the same roads the British built, the same trains and railway tracks, the same buses.

It was only a matter of time they were going to go under.

I think they should be left to go under now, the West have there own problems with the economy without having to bailout Pakistan's.

Just like the relatives were bleeding relations in Western countries for money from brothers and sisters, it was all to no avail.

[Subhabrata]

Zardari may just be blackmailing the world. In an interview he said ¨If I can't pay my own oil bill, how am I going to increase my police? The oil companies are asking me to pay $135 [per barrel] of oil and at the same time they want me to keep the world peaceful and Pakistan peaceful" .

The reaction he anticipates - World will lend Pakistan billions of dollars to make him drag Pakistani economy to safety zone in this times of crisis. As a bonus, US might agree to sell advanced military equipment which it can occasionally use against terrorists and at the same time replenish its demanding military and brandish against India.

While the situation of Pakistan economy is grim, at the same time it is nowhere near being bankrupt.

Pakistani PM knows that being nuclear-armed state, the western world would not allow them into bankruptcy fearing the worst; his gulf allies would provide oil at a discount rate fearing the only Muslim nuclear armed nation going kaput; China would loan money to Pakistan fearing their counterbalance to India going bust.

It may be a cleverly thought off move.

[villa te koop]

I think at this point of time of global financial crisis, pakistan coud be one among those with risks of bankruptcy. I also think, that it is not a surprise that they may be in need of help from the world for bailout.However in view of previous records of pakistaini financial policy yes I do agree upon that there is a question mark on the validity reports of expected bankruptcy in pakistan.

[chapter 11 bankruptcy]

Wow, had not heard this news. If a nation goes bankruptcy we have to hope that does not cause a domino affect.