Sunday, March 07, 2010

Iceland's ice-tea party

Viking Funeral

Icelanders voted overwhelmingly on Saturday to reject a €3.9bn debt repayment deal with Britain and the Netherlands in a move that threatens to derail international support for the country’s crisis-hit economy.(...) The resounding rejection reflected deep public anger over a deal which critics said would punish taxpayers for the mistakes of bankers and regulators and pile more debts on a country of 320,000 people struggling to rebuild its shattered economy.(...) While the outcome had long been a foregone conclusion, many voters appeared to relish the chance to vent anger against a deal that would lumber every Icelandic household with a debt equivalent to €48,000. Financial Times
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This Icelandic rebellion presents some interesting features. Iceland is a very small country which has been terribly poor throughout most of its history, poor, nearly to the point of starvation in some periods. However until recently voodoo economics and bubbledom were extremely kind to them. Let's let Wikipedia do the heavy lifting in explaining how kind:
In recent years, Iceland has been one of the wealthiest and most developed nations in the world. In 2007, it was ranked as the most developed country in the world by the United Nations' Human Development Index, and the fourth most productive country per capita.
Then Lehman  Brothers went down...
In 2008, however, the nation's banking system systematically failed, causing significant economic contraction and political unrest that led to early parliamentary elections making Jóhanna Sigurðardóttir the country's Prime Minister.
So the government of Iceland went and cut a deal with the principal creditors, Britain and the Netherlands, to pay it all  back, to the tune of $135 a month for every man, woman and child for eight straight years: but the president of Iceland refused to sign such a draconian payback scheme without a national referendum and the voters were not about to hock their future and the future of their children to clean up the mess made by a bunch of overly clever financiers and 90%  of the voters voted no.

Iceland presents a perfect miniature of what this crisis means: a country considered the most developed in the world, with a wonderful welfare and educational system has been ruined by a handful of wiseguys and now all the sick, the children and the old pensioners are going to have to pay for it... for many, many years.

What comes next? Reuters has a pretty good  rundown on the alternatives:
Iceland's finance minister said on Sunday the government wanted to reach a new agreement before the British and Dutch governments get bogged down in elections. Britain's elections must be held by June 3 and are expected for May 6 which means the government will be focused on an election campaign, and the Netherlands holds elections on June 9, which means the window for doing a deal is tight.(...) If the three nations cannot move ahead within a few weeks, Iceland's plight may deepen. The Dutch and British have expressed frustration Reykjavik has not accepted the terms on the table -- a more attractive variable interest rate instead of the previous fixed rate. Under this scenario, negotiations may be stalled until well into the second half of 2010, particularly if it proves difficult for new governments to take shape in Britain or the Netherlands after their elections. Iceland's GDP will contract roughly twice as fast as previously expected in 2010 if the Icesave deal is delayed by several months, its economy minister has said.(...) Iceland's chances of joining the EU would lessen. The Dutch have publicly linked Icesave with the EU bid. The pro-EU camp would find it far harder to make a case to enter a union that includes Britain and the Netherlands. The worst outcome for all three countries, and the one considered least likely, is that no deal gets done. Iceland would be cut off from capital markets and aid. Its economy would have no chance of recovering. (...) Iceland would have to rely more on its fishing sector, which in decades past had played a key role in the economy. By late 2011, it would face problems repaying other debts and could default. (...) Joblessness, in an island that had almost zero unemployment before the crisis, would soar raising the threat of social unrest. Last year unemployment was already 8 percent.(...) The two EU countries would also have no guarantee of repayment. Icelandic resentment towards the British and Dutch, and the EU in general, could be expected to be high.
Now we are talking about 5.3 billion dollars here. With the trillion dollar bailouts we are hearing about nowadays, is 5.3 billion dollars all that much money?

Thank about it, a NATO member with a uniquely strategic location, which you could buy outright or at least secure the undying goodwill of its massively disgruntled population...  for a paltry 5.3 billion dollars! Just to make this real for you, that is barely more than an aircraft carrier costs the US taxpayer.

This is a bill that somebody like Mike Bloomberg, Bill Gates or Warren Buffet could settle with a personal check. And if you stop and think about it some more, it wouldn't stretch Venezuela or Iran's budget that much either... or Russia's or China's...

Think how much trouble somebody with $5.3 billion to spare could cause Britain and the Netherlands, like Iceland both members of NATO. Think how much trouble they could cause NATO and the European Union.

The people of Iceland are angry enough to jump at almost anything.

Probably all of this has crossed quicker and better informed minds than mine, which is a good reason to believe that some settlement will take place that wont put too much strain on the European Union, NATO or the IMF... Or the people of Iceland: certainly the "markets" had better think twice before "making an example" of them.

Still, this is low hanging fruit for any troublemaker lurking in the wings. DS

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