Demonstrators outside the Islamabad Stock Exchange in July

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.

Crossposted from Newshoggers