What are the immediate observable impacts of currency devaluation (this may also be relevant for the U.S. soon):

1. Speeds up asset quality deterioration and write-downs as unhedged corporate and retail customers that have borrowed in foreign currency face a relative increase in their debt burden.

2. Borrowers may chose to withdraw local currency savings to transfer them into a more stable foreign currency, which would shrink banks' funding base.

3. The capital ratio of banks with large foreign currency exposure will fall as a consequence of currency devaluation-related issues.

So as the vicious cycle of risk aversion accelerates in more countries, it results in domestic economies becoming worse off, thereby making traditional international commerce impossible, and impacting larger beneficiaries of globalization such as the G7.

But that is not all: in addition to sovereign risk, external investors also have creditor, liquidity and cash repatriation risk. The is because many West European banks acquired East European banks in the course of of privatization of state-owned banks during the transition from planned to market economies. According to the Bank for International Settlements, claims of West European banks on Eastern Europe amounted to €1.3 trillion in the first quarter of 2008, which depending on the degree of contraction and asset write-downs could be significantly impaired.

As the chart below shows, the countries that stand to be impacted worst by Eastern European bank deterioration (by being domiciles to investing banks) are Austria, France, Italy, Belgium, Germany and Sweden, as banks in these countries account for 84% of Eastern European bank claims. And of these, Austria is most on the hook, as E.E. banks account for half of Austria's global bank claims. Specific bank names that have the most exposure include Raiffeisen Bank, Erste Bank, Soc Gen, Unicredit and KBC.

This presents the case for the unwind of globalization, which is worthy of a much more indepth analysis. Over the past 10 years, as the globalization and credit bubble went hand in hand, we will inevitably see the ripple effects of a globalization in reverse, marked by constrained trade relations and minimized international commerce, in addition to the expected problems of how to deal with a widespread increase of domestic corporate and sovereign defaults, and spiking f/x rates and deflation. The true shape of the global economic problem is only now starting to take gradual shape.

Indicatively, the CDS levels of some Eastern European countries have been the biggest underperformers in recent days, and some are presented below.