Global Economic Crisis

High noon in the high Arctic is fast approaching, as the people of Iceland get set to vote on March 6 in a national referendum on a plan to compensate the British and Dutch governments for their payments to deposits in their respective countries who lost money in the collapse of  Iceland’s banks. It was one of these banks, Landsbanki, which ran Icesave as an online bank that enticed foreign depositors by offering above market rates of interest on accounts. Under immense pressure from the UK and the Netherlands, the government in Reykjavik agreed to pay back more than $5 billion to the two governments, representing a significant part of Iceland’s GDP over several years.

Widespread disapproval of the agreement by the people of Iceland led the nation’s president to decide not to approve the agreement, but rather allow the people of Iceland to exercise their sovereign right on the fate of the Icesave agreement through a national referendum. Despite warnings of economic and financial isolation parallel with economic disintegration emanating from the Icelandic government and the UK and Dutch authorities, it seems almost certain that the Icesave agreement will be overwhelmingly repudiated by Iceland’s voters.

What is occurring in Iceland is noteworthy for the following reason: after politicians throughout the world have adopted the policy that taxpayers must bear the financial costs of failure in the private sector by so-called “too big to fail” businesses, for the first time an aroused citizenry is utilizing the ballot box to say to the policymakers: “Enough!”

An extraordinary development is occurring in the tiny island nation of Iceland. The first sovereign casualty of the financial Tsunami that occurred during the onset of the global economic crisis in 2008,  Iceland underwent a fiscal meltdown and currency collapse when its 3 largest banks became insolvent. A neo-liberal government allowed Iceland’s financial industry to go global amid an environment of deregulation. The result was that  Icelandic banks held more deposits from foreigners than from the nation’s citizens.  When the global economy went into a nosedive, the three banks were rendered utterly insolvent, with liabilities exceeding the GDP of Iceland by a multiple of ten.

The national currency, the krona, collapsed. The government was forced to nationalize the three banks, go to the IMF for emergency loans, then resign as the population of Iceland erupted in a massive display of civil disobedience. A new government came to power, seeking to responsibly cope with the profound financial disaster that has engulfed Iceland. However, the governments of the UK and the Netherlands, which had reimbursed citizens who lost their deposits in the Landsbanki, which had enticed them with above market interest rates through a program known as Icesave, demanded that Iceland  assume full financial liability  and pay back those governments. Desperate to enter the European Union and receive additional IMF help, the government in Reykjavik felt it had no choice but to a agree to compensate London and the Hague, to the tune of  $6 billion, payable over 15 years. This would mean that every one of Iceland’s 300,000 souls would be responsible for paying the British and Dutch governments $20,000. The Icelandic government has told its citizens that there is no choice; either abide by the agreement or accept isolation from the global financial system, junk bond status in sovereign debt markets and a termination in loans from the IMF.

The citizens of Iceland have reacted with a petition containing  the names of 25% of the nation’s registered voters, opposing the agreement. In response, Icelandic President Ólafur Ragnar Grímsson announced that he would not sign the agreement as approved by the nation’s parliament, and would instead call for a national referendum. Current projections are that 70% of the voters would reject the agreement.

What is now occurring in Iceland is a foretaste of what may become more common throughout the developed world. Taxpayers have been told by policymakers that they must bear the financial costs of failed decisions made by private business, no matter how steep the price, or accept even more horrendous economic consequences. For the first time, an aroused public in at least one country has rejected the dictates being imposed by the political establishment. No wonder that the Dutch and British governments reacted so swiftly with a condemnation of Iceland’s citizens for having the audacity to think they have the right to exercise their democratic rights in deciding for themselves what is in the best economic interests of their nation.

As the global economic crisis continues, leading to more private business failures and demands by policymakers that taxpayers fund ever-larger bailouts, look for other aroused publics following in the footsteps of Iceland’s angry citizenry.

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.