New international debt crisis looming?

A new and worrying twist to the global financial crisis emerges today.

If we didn't know it already, the lesson of the past few months is that we can't go on living beyond our means. What applies to individuals also applies to countries who import more than they export. The difference between what a country earns (its export revenue) and what it spends abroad (its import bill) has to be paid for. This difference is known as a current account deficit on the balance of payments. Countries bridge this gap by attracting flows of money, measured on the capital account of the balance of payments. These flows take many different forms - foreign direct investment and private and public sector borrowing. All very well if those providing the capital carry on doing so or don't want it back in a hurry. Not so good if this source of long-term capital dries up or the investors want their money back.

Just as a loss of confidence in the banking system causes individuals to withdraw their cash (a run on the banking system), a loss of confidence in a country's ability to repay its 'debts' causes a run on the currency. Capital flight, as it is called, can send a currency into free fall and countries going cap in hand to the International Monetary Fund (IMF).

So much for the theory. It's happening. According to the BBC's business reporter, Robert Peston:
Queuing up for the intensive care ward are Iceland, Hungary, Pakistan, Ukraine and Belarus, all of which are in discussions about accessing special loans from the International Monetary Fund, the emergency medical service for the global economy.
But there has also been a substantial withdrawal of capital from South Africa, Argentina and - most worrying of all - South Korea.

South Korea's balance between its exports and imports (its balance of trade) is much healthier than the UK's and they are not nearly so dependent on financial services as a source of export revenue. Sterling is falling on the foreign exchange markets. Is this the start of a new international debt crisis? Will the UK be next in the queue at the door of the IMF?

Read Robert Peston's excellent blog here.