Posts Tagged ‘davos’

Global Economic Crisis And The Meltdown Of Iceland

January 30th, 2009 Comments off

As the major actors of the global economy gather in Davos for the World Economic Forum, they might shift their gaze from the landlocked enclave of Switzerland to another frigid enclave enveloped by the chilling waters of the Arctic Ocean and Denmark Strait; Iceland. For it is on this sparsely populated Island nation of 320,000 inhabitants that ground zero for what the Global Economic Crisis can unleash is being experienced. As a harbinger of the economic doom that the global financial disaster can inflict on human societies, Iceland should serve as a clinical laboratory for what much of the rest of the world is in store for, as the masters of the universe continue to feast on champagne and caviar at rarefied summits such as that occurring in Davos.

Iceland once had a reputation for hardworking fishermen, and financial thriftiness. Its budgets were usually balanced or in surplus, and its banking sector was responsibly regulated. Then came the ideology of the so-called “free market” in banking, bringing along a wave of financial deregulation. The financial engineers that populated Iceland’s banking sector dreamed up a new way to make money; have Iceland’s banks borrow heavily via short-term debt, while offering above-market interest rates to recruit bank depositors overseas. Iceland’s banks actually had more depositors outside of Iceland, especially the United Kingdom, when the global financial crisis exploded all the unstable banking models irrespective of national frontiers.

Iceland’s three largest banks became insolvent as the credit crunch pinched their access to short-term financing while simultaneously overseas depositors began a run on those banks. This resulted in a panicky Icelandic government being forced to place in receivership and thus nationalize Glitnir Bank, Landsbanki and Kaupthing, the latter being the nation’s largest bank. The potential liabilities of these banks exceeded the entire GDP of Iceland by a multiple of five, forcing the government to seek emergency financial aid from the International Monetary Fund (IMF) as the country’s currency, the krona, went into free-fall collapse.

The financial catastrophe that has engulfed Iceland has crippled her economy and brought about a political crisis fed by social unrest and collective fear that is unprecedented in her history. Prime Minister Geir Haarde has been forced to announce his resignation and the calling of early elections, as he and his senior ministers have been virtually besieged by non-stop demonstrations representing the anger of a large proportion of the population. As the internal situation in Iceland deteriorates, her external image has been forever tarnished by the irrational behavior of the nation’s bankers. With numerous foreign depositors demanding access to their accounts from these now insolvent banks, the British government went so far as to publicly declare that Iceland was a terrorist state. Such is the level of discord that is being aroused by the Global Economic Crisis.

Undoubtedly, Iceland is about to enter an economic apocalypse. It is absolutely impossible for this small nation to cover a potential liability that is five times as large as its entire annual GDP without the largesse of the IMF, among other benefactors. Even with this assistance, Iceland will be economically crippled far into the future, creating a pall of gloom that is enveloping this small country.

Some will say that Iceland is an exceptional case, because even projections of severer financial carnage in the United States do not come near to five times the GDP of the world’s largest economy. Those comforting themselves with such logic miss the point. Even if all the potential losses from the insolvent banking sector in the United States, added to insolvent households, public and corporate debtors, amounts to “only” half the American GDP, the scenario that occurred in Iceland remains highly relevant. In both situations, be it with a small economy or the world’s largest, the systemic financial meltdown is beyond each country’s capacity to “repair” the damage utilizing its own economic resources. There is, however, one important distinction. Unlike Iceland, the United States does not have the option of running to the IMF for a bailout.


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