This is progress?

A year ago Wall Street analysts, credit rating companies such as Standard & Poor’s, and individual investors were putting together lists of banks in danger of failing.

Today, the lists are of deeply indebted countries in danger of defaulting on their debt.

The catalyst for today’s lists is the crisis in Dubai, where a government-controlled conglomerate, Dubai World, has declared a 6-month standstill on paying interest or principal on $26 billion in debt. Banks had assumed that this debt was somehow guaranteed by either the government of Dubai or by neighbor Abu Dhabi or by the central government of the United Arab Emirates. Yesterday, November 30, the government of Dubai told banks they were greatly mistaken and that Dubai would not stand behind what it now calls “private corporate” debt.

That hasn’t exactly ended fears that Dubai itself could default. Or that the contagion could spread to other countries. Egypt’s stock market took a beating on November 30, falling 8% on the day, for example.

All of which has led investors to try to figure out who might be next.

You can put together a list in two ways.

First, you can simply look at countries with huge debt levels and relatively small and weak economies. A dysfunctional government with a small (or no) majority and divided by disputes helps earn a country a place on the list.

Following this methodology, countries that make the list, according to the Bank of International Settlements, include Greece (which owes $236 billion in public and private debt to creditors in the United States and Europe), Russia ($192 billion public and private owed), the Ukraine ($40 billion public and private owned), Lithuania ($38 billion public and private owned), Latvia ($31 billion public and private owned), and Pakistan ($12 billion public and private owned).

Countries with bigger debt burdens such as the United Kingdom, Japan, and the United States don’t make the list so far because their debt is mostly denominated in their own currency (which gives them the option of devaluing their way out of the hole), because their economies are bigger and healthier, or because while the amount of debt is huge, it’s been huge for a while and the country has a history of successfully rolling over debt as it matures. (Again so far.)

Second, you can look at countries where the credit default swaps market, a market for derivatives that act as insurance against a debt default, are charging a high insurance premium. The greater the perceived risk of default, the more expensive it is to buy insurance in the credit default swaps market.

Countries showing recent big increases in credit default premiums include Greece (see also list #1) and Ireland.

This market also shows how thoroughly this crisis has turned the world upside down. Developing economies such as China, Brazil, Poland (Poland? Yes, Poland), and Chile all show lower credit default swap premiums than developed economies such as Greece and Ireland. China is priced at the same risk level as the United Kingdom. (I’d argue that the market is under-estimating the default risk of one member of that pair and it isn’t China.)

The reason for the lower risk premiums for these emerging economies—once considered far riskier than the world’s developed economies—is that they haven’t had to pile on nearly as much debt in efforts to fix financial and economic busts.