Colder Than Ever in Iceland: Economic Disaster Strikes

Many people in the U.S. are cutting discretionary spending in response to the current recession with its stock market losses, mortgage industry casualties, higher unemployment statistics and credit concerns. But our troubles are as nothing compared to the problems facing the folks living in Iceland. In that tiny north Atlantic island nation, they are dealing with a nearly worthless currency, bank failures, relatively large-scale job losses, soaring inflation and major roadblocks in conducting foreign trade. Not being able to buy much in the way of Christmas gifts this year is obviously the least of their worries.

How did this happen? It seems that an unusual combination of bad luck and/or timing along with inept maneuvering by Iceland's central bank head David Oddsson contributed to the debacle. The three largest banks in the country defaulted and were nationalized in late October. The krona, Iceland's dollar, went into a free-fall as did its stock market until trading was suspended for a few days. Prime Minister Geir Haarde caused an international incident by sparring with Great Britain's leader Gordon Brown over bank deposits of British citizens, thousands of whom had placed money in high-interest savings accounts promoted by the Icelandic banks. In high dudgeon, Brown invoked anti-terrorism legislation to freeze Icelandic assets in Britain while demanding that all UK savers be reimbursed. An agreement on the issue was negotiated, but little has so far been said about the British local government bodies and charity organizations which also claim deposits in the Icelandic financial concerns.

Haarde was finally able to secure assistance from the International Monetary Fund. Additionally, Nordic neighbors Norway and Sweden have also come to the rescue of their tiny ally, who had also been considering seeking loans from Russia. Billions of dollars are involved here, as Iceland's formerly privatized banks had operated in the high-risk/high-return realm of foreign currency trading. Their problems were nothing like the subprime mortgage loans and complicated securities vehicles which brought about the downfall of American investment banks. Instead, the global credit crunch led to a balance-of- payments snowball to end all snowballs. The banks couldn't leverage loans, not even from the central bank as directed by Oddsson, to pay off impending financial obligations. The re-nationalization of the banks cemented the debacle.

Not everyone in Iceland is cast down by gloom, however, as the state tourism agency has been busy marketing the country as a terrific bargain destination. Interest in joining the European Union has gained popularity of late as the compensations of belonging to a large federation look to outweigh those of going -it-alone in the present economic climate. Demonstrations against government officials have proven one way of venting frustration as people deal with financial loss and face reinventing a future no longer looking quite so comfortable as it did just a year ago.

You think you have problems. Be grateful you're not an Icelandic citizen right now!

Sarah Lyall, "Iceland, Mired in Debt, Blames Britain for Woes", New York Times Dealbook Business Blog

Jonathan V. Last, "Iceland Melts Down", The Weekly Standard

Gregory Roth, "Ailing Iceland Invites Tourists and Dollars", New York Times

"Iceland protest ends in clashes", BBC News