Latvia, and several other former Soviet bloc nations have been on life-support for a long time. It looks like the first eastern European domino is about to fall.
(MarketWatch) -- It's never good news when a government bond auction fails. It's particularly bad news when an auction fails for a note maturing in just six months. And it's really bad news when there isn't any bid at all.
Yet that's what happened Wednesday when Latvia tried to sell close to $17 million of paper.
The Baltic country is squabbling with Western -- mostly Swedish -- leaders over spending cuts, and it's a very real possibility that the country may be forced to devalue its euro-pegged currency if emergency global funds don't arrive.
Were Latvia to devalue, that would hit economies in neighboring countries like Lithuania, and Swedish banks would rack up additional losses on the loans they have made throughout the region.
The real nightmare scenario would be the Swedish banks then pulling down other European banks, and then triggering Credit Crunch: Part 2.
None of this is certain yet, but Latvia and its neighbors have been been paying off its debts with increasingly more borrowed money for nearly a year. It's a ponzi situation that can't continue forever. Eventually debts are going to have to be written off.
Whether the trouble spreads to other nations is anyone's guess.