What's the chance that Switzerland will soon go bankrupt?

We've already seen Iceland go bankrupt as a result of the failure of its major bank, Kaupthing. The two Swiss banks, UBS and Credit Suisse, are a larger part of the Swiss economy than Kaupthing was of the Iceland economy, and both Swiss banks are teetering on the brink. Here is Portfolio.com's Felix Salmon:

UBS has a $2 trillion balance sheet; Credit Suisse has another trillion on top of that. Call it $3 trillion between the two of them, which is about ten times Switzerland's GDP of $300 billion or so. Now that's what I call too big to save. Oh, and did I mention? At the end of 2007, Credit Suisse was levered by more than 40 times; UBS was levered by more than 64 times. A 16% fall in UBS's assets would wipe out not only all of its equity but 100% of Swiss GDP on top.

John Quiggen at Crooked Timber also points to the risk presented by Citi Group.

The failure of Citigroup, which looks increasingly likely to happen in the near future, would mark the end of the beginning of the financial crisis. Until now, the prevailing view has been that the crisis and recession will pass in a year or so, after which things will go back, more or less, to the way they were, with a few less financial institutions, and a bit more regulation. A Citigroup failure would put paid to that idea.

Citi is not only too big to fail, it’s too big to rescue with any of the half-measures that have been tried so far. Only outright nationalization is feasible, and that will probably require joint action by a number of governments; Citigroup’s global operations are too big for the US to handle alone. After that, the kinds of tinkering discussed at the G20 last week will be irrelevant. It’s now unsurprising to read (on CNBC!) predictions that all US financial institutions will be nationalized within a year. That’s probably an overstatement: as long as the economy doesn’t really crash, there are plenty of small banks and credit unions that will survive, but few of the big names will be among them.

So Credit Suisse, UBS and Citi are all being looked at as the next Lehman Brothers, which Treasury Secretary Henry Paulson made the massive error of allowing to go bankrupt without considering the consequences for the overall economy. Lehman Brothers put the banking industry on notice that any one of them could be the next to go and there was no certainty that the government would bail them out. Now we look at Citi which is so large that no single government can bail it out, and the two Swiss banks which dwarf the Swiss economy even without the rather amazing levels of leverage they have.

This of course it just banking institutions. But consider the way the banks reacted to Paulson allowing Lehman Brothers to fail. Now Paulson and the American Congress are delaying any action at all to bail out General Motors. What happens to the rest of the economy if GM goes under? I frankly don't think they understand that they brought a lot of their crisis on to themselves, but they are highly overpaid executives. Such people to not learn because they already know it all and their paychecks prove it.

But at the same time, the ripple effects of any of the Detroit big three going into bankruptcy will be massive, even though the details are totally unpredictable.

In the meantime, Paulson and the Bush administration are doing absolutely nothing as everything collapses around their ears. sort of, you know, like the unaware and unlearning Detroit big three executives, aren't they? Probably not a Democrat in the bunch in Detroit, and the Republican Bush administration is so conservative that they probably still believe that the free market will magically save everyone in the last reel of the movie.

I've been saying for a while now that we see no change from the downward trajectory of the economy, and we don't know where the bottom is. That's still true - in Spades.