The third financial nuke explodes-(East European) Sovereigns about to default

First of all, keep in mind that these CDS shooting through the roof is a $60 trillion market and the fact that someone (banks) are on the wrong side of that trades have amounted to trillions of losses right now. Put that into context with what the $660 billion of losses in mortgage related products did to the system. Do not make the mistake to think that the winner on the other side of the trade equals the equation. The critical mass is that a loss so big that the counterpart can not pay the winner will turn the winner into a looser too and trigger a sequential default since he, the winner had resold at some point his position and can not pay the next winner etc.. Freaking scary but, as Warren Buffett truly said, these are weapons of mass destruction - no one has that kind of money to cover such an effect.

European Banks and Companies invested big money into the Eastern European countries, economies. That's why the Euro keeps dropping like a hot potato - the losses for 'Old Europe' will be unprecedented and much bigger than the effect for the USA. The distress in these countries is a reaction to the capital freeze through the LEHMAN failure as a trigger, which ripples through the system now and infects every weak spot. CDS (credit default swaps) for those sovereign countries are at levels these countries would default on usually. The IMF is supposed to pump again hundreds of billions into these countries. On the other hand, European banks that made big business with these countries will suffer severe losses, so severe they might collapse - front seat take Banks in Austria.

Excerpt:
http://www.telegraph.co.uk/news/worldnews/europe/russia/3248672/Russian-default-risk-tops-Iceland-as-crisis-deepens-financial-crisis.html

Russian default risk tops Iceland as crisis deepens

Russia's financial crisis is escalating with lightning speed as foreigners pull funds from the country and the debt markets start to price a serious risk of sovereign default.

Russia's financial crisis is escalating with lightning speed as foreigners pull funds from the country and the debt markets start to price a serious risk of sovereign default.

The cost of insuring Russian bonds against bankruptcy rocketed to extreme levels yesterday. Spreads on credit default swaps (CDS) reached 1,123, higher than Iceland's debt before it sought a rescue from the International Monetary Fund.

Moves by Hungary, Ukraine and Belarus to seek emergency loans from the IMF have now set off a dangerous chain reaction across Eastern Europe.

Romania had to raise overnight interest rates to 900pc on Wednesday to stem capital flight, recalling the wild episodes of Europe's ERM crisis in 1992. The CDS spreads on Ukraine's debt have topped 2,800, signalling total revulsion by investors.

Rating agency Standard & Poor's issued a downgrade alert on Russian bonds yesterday, warning that a series of state rescue packages worth $200bn (£124bn) could start to erode the credit-worthiness of the state.

This crisis now is a gathering of all former crises which has the elements of 1992, LTCM, 1974 and 1929 all together - this is about to grow into the mother of all crises. since this happens as the deleveraging is going on and forced selling of funds increases - it can and likely will trigger a stampede of unseen dimensions . Roubini could be right that even the market might be closed as they did in 1987. Now we get the test of the 2002 lows but in a more volatile manner. Central banks need to act with rate cuts, substantial cuts, if that is enough I do not know, since the weekend ANGST of defaults will put markets in panic. The fact that PPT forced shorts to cover the last 2 days will be expensive - as it always is to interrupt the natural flow..