Derivatives explained...with history

Note the article was written in 2001.

"In August 1998, an unexpected non-linearity occurred that made a mockery of the models. Russia defaulted on its sovereign debt, and liquidity around the globe began to rapidly dry up as derivatives positions were hastily unwound. The LTCM financial models told the principals they should not expect to lose more than $50m of capital in a given day, but they were soon losing $100m every day. Four days after the Russian default, their initial $3b capital base lost another $500m in a single trading day alone!"

What happens when The West defaults?

[insert grossly buggered smilie bleeding from all orifices, lying in a dead heap]

Full article.