If you thought Iceland was bad, look out in case Russia's escalating financial crisis blows up. Not so long ago the Icelanders were looking to Moscow to bail out their banks with a multi-billion dollar loan, but funds are now leaving Russia as fast as they can go, as panic spreads from Hungary, Belarus, Romania and Ukraine.

The markets are starting to think the unthinkable and consider the risk of a sovereign default, according to the Daily Telegraph. Insuring against the risk that Russian bonds might not pay out – the famous Credit Default Swaps – has become very expensive: the spread reached 1,123 yesterday, which was higher than Iceland’s when its financial sector was going into meltdown.

But that was still modest compared with the CDS spreads on Ukraine's debt, which have exceeded 2,800 – meaning that nobody wants to touch it with a bargepole. Russian companies accumulated an estimated $530bn of foreign currency debts during the oil-fuelled expansion of recent years – the domestic bond market is under-developed -  and must now roll over $47bn of foreign loans over the next two months, and a further $150bn or so next year.

It is not clear that they can do it, and there are growing doubts about the Government’s ability to guarantee these debts. If all this seems a bit remote, so did Iceland until recently – and the impact of a Russian collapse on Western Europe would be much greater.       

---

Tag this article :