Global financial crisis may hit hardest outside U.S.

— -- It's a measure of the global economy's current frailty that the prospect of a financial meltdown in nuclear-armed Pakistan is almost getting lost amid an ever-lengthening list of countries in trouble.

In Europe, Hungary and Ukraine require multibillion-dollar International Monetary Fund rescues while Standard & Poor's lowers neighbor Romania's credit rating to junk status. Argentina's government is trying to close a financial gap by putting private pension funds under government control. And Asian nations with unsustainable finances such as Vietnam and the Philippines are braced for harder times.

Like tremors before an earthquake, these financial ills hint at the tangible economic toll to come in lost jobs, income and factory orders. "What has not even started is the effect on the real economy. … The situation is going to get very, very dire," says Marino Valensise, chief investment officer for Baring Asset Management in London.

If the first wave of the financial crisis hit the United States hardest, the second blow seems set to punish foreign lands. Global pain now is spreading from the United Kingdom, where the economy already is shrinking, through Middle Eastern oil producers pinched by crude's price plunge, to Japan where the government said Tuesday that September's retail sales were lower than a year ago.

Suddenly, after six consecutive years of expansion, the world economy appears to rest on quicksand. Signs of economic wobbling are evident in Germany, where automaker Daimler said Monday it is shuttering 14 plants for a month because of evaporating demand. Even China's growth is slowing sharply, from nearly 12% in mid-2007 to 7.9% or less next year, according to Standard Chartered Bank.

The potential consequences of economic turmoil are especially worrisome in Pakistan, where the economy is in a "state of crisis," according to the Economist Intelligence Unit. Soaring food and oil prices coupled with runaway spending have made a mess of the government budget. Inflation is expected to top 15% next year, and the IMF is in talks with Pakistani officials about emergency financing.

"Every day that passes, things get worse. … The economy is in a downspin," said Zubair Iqbal, a retired IMF economist now at the Middle East Institute in Washington, D.C.

Pakistan in recent years attracted ample foreign investment and registered strong economic growth. But its economic heft remains modest. The South Asian nation's global significance is geopolitical: Pakistan is a sometimes-uncertain U.S. ally against Islamic extremists based in the country's tribal regions along the Afghanistan border.

Selig Harrison, an expert on the region at the Center for International Policy, says further economic deterioration would exacerbate ethnic tensions and undermine already fragile support for the country's new civilian government. "From a U.S. point of view, the political fallout from an economic collapse would be very, very dangerous," he said.