Jon Danielsson has a very thorough piece up on the VoxEU site which details the catastrophic collapse of Iceland and its banking system. This is a cautionary tale on two fronts.
First, Iceland was a small country with a very large banking system. This has meant the country is simply not big enough to bail out its banking system. Other countries with similar problems dot the economic landscape, the UK and Switzerland being two very prominent examples (see related posts below for more details).
But, Iceland was also a small country with massive macroeconomic disequilibria. The United States has gotten on well enough despite its own imbalances, but it owns the world’s reserve currency. However, other small nations with similar imbalances are in desperate situations. This list should include the Baltics, Hungary and Argentina. (see reference posts below).
It is not clear to me that the Icelandic example is an isolated case given these two groups of countries and their tenuous economic circumstances. Please read the excerpt here with that in mind.
Iceland’s banking system is ruined. GDP is down 65% in euro terms. Many companies face bankruptcy; others think of moving abroad. A third of the population is considering emigration. The British and Dutch governments demand compensation, amounting to over 100% of Icelandic GDP, for their citizens who held high-interest deposits in local branches of Icelandic banks. Europe’s leaders urgently need to take step to prevent similar things from happening to small nations with big banking sectors.Iceland experienced the deepest and most rapid financial crisis recorded in peacetime when its three major banks all collapsed in the same week in October 2008. It is the first developed country to request assistance from the IMF in 30 years.
Following the use of anti-terror laws by the UK authorities against the Icelandic bank Landsbanki and the Icelandic authorities on 7 October, the Icelandic payment system effectively came to a standstill, with extreme difficulties in transferring money between Iceland and abroad. For an economy as dependent on imports and exports as Iceland this has been catastrophic.
While it is now possible to transfer money with some difficulty, the Icelandic currency market is now operating under capital controls while the government seeks funding to re-float the Icelandic krona under the supervision of the IMF. There are still multiple simultaneous exchange rates for the krona.
Negotiations with the IMF have finished, but at the time of writing the IMF has delayed a formal decision. Icelandic authorities claim this is due to pressure from the UK and Netherlands to compensate the citizens who deposited money in British and Dutch branches of the Icelandic bank Icesave. The net losses on those accounts may exceed the Icelandic GDP, and the two governments are demanding that the Icelandic government pay a substantial portion of that. The likely outcome would be sovereign default.
The post in VoxEU is much longer and very thorough. Please read the rest at the source link below.
Related posts – UK
The Last King of Scotland
Related post – Switzerland
Switzerland: politicians need to act now
Related posts – Emerging markets
The emerging markets crisis
Currency crisis is gathering storm
A shift to Eastern Europe and emerging markets too
The Euro and Baltic currency overvaluation
Are the Baltics the new Argentina?
Argentina faces potential collapse
Related articles
Iceland, Switzerland, Denmark, Sweden, Jordan and countries with banks that are too big to bail out – Bronte Capital
Source
The first casualty of the crisis: Iceland – VoxEU
Related posts:
