The Crisis in Iceland: Every Bubble Ends in Rubble
A friend asked me at brunch recently about the situation in Iceland. Here is a commentary:
The small nation of Iceland–population 320,000–can’t produce much of anything that is in demand in the international markets. During the 60s and 70s Icelandic Airlines had a pretty good business running the cheapest flights you could find between the US and Europe, but that is long in the past. They do catch fish out of the dwindling North Atlantic fisheries, and tourists show up who appreciate the stunning natural beauty of a landscape with geysers, hot springs, and an abundance of wilderness hiking. But that’s about it.
Technologically the Icelanders are highly competent, which helps them produce sufficient geothermal and hydroelectric energy to produce their own electricity.
During the worldwide explosion of high finance, particularly during the early to mid-2000s, they became investors, applying their skills as robust ex-Vikings to working the world’s financial markets. By big-time borrowing from European banks, including British ones, they were able to leverage their credit into substantial stock and bond holdings. Iceland was once one of Europe’s poorest nations, but now it began to feel and act rich.
Unfortunately, when the world’s financial system tanked in 2008-2009, Iceland fell hard and fast. The investors lost not only their shirts but also their thermal underwear, and their creditors–led again by Britain–found them in default. With the banks going, well—bankrupt–and the Icelandic government taking them over, the creditors naturally looked to the government to make good on the nation’s debts. The government approached the International Monetary Fund for bailout loans, with the IMF, as is its wont, expecting them to raise taxes and cut public services in order to free up money.
Since Iceland is not part of the EU, they have a certain ability to resist and to tell Britain et.al. “up yours,” and that is pretty much where it stands. Economically they are back to pondering how to support what had become one of the most prosperous lifestyles in the world, since fish and tourism don’t quite do it for a modern state. Iceland is also looking to the other Nordic nations for financial help and is trying to get outsider oil companies to search its territorial waters for petroleum deposits.
Nothing can hide the fact that Iceland remains in serious financial trouble with its sovereignty deeply compromised. The Icelanders have also become something of heroes to progressives who like to see someone stiffing the international bankers, or at least wanting to. But nothing can change the fact that Iceland is an object lesson in what can happen to a nation that hangs its prosperity and its future on a financial bubble.
Every bubble ends in rubble. At least Iceland now has a chance to look within to its own human and natural resources for salvation.