Icelandic Meltdown
If you were going to guess which country would be the first to succumb to the financial collapse, you probably wouldn’t have come up with Iceland, even though the island nation has been battling a currency crisis since the Spring. After all, Iceland has no real national debt to speak of, and significant low cost sources of energy (geothermal and hydroelectric). So why Iceland?
Well, the proud nation hasn’t quite caved in yet, so perhaps we shouldn’t jump the gun. However, last night, the currency of Iceland – the Icelandic krona – fell roughly in half against major currencies. In reality, it’s fallen so far in the last few weeks, that it is temporarily not even traded internationally… which is very close to saying that the entire monetary system of a developed, 1st world, NATO country collapsed overnight. Doubleplusungood.
Like many places in the West, Iceland had recently gotten a bit ahead of itself. Housing prices were sky high, consumerism was rampant, and good old Reykjavik had become something of a weekend escape for the international elite. Things could have been worse, though. The economy was strong, the workforce is educated, prospects were good on all fronts, and it seemed that Iceland was headed into a 21st century utopia.
It was not meant to be. The problem turns out to have been Iceland’s banks. You see, the island nation figured that finance suited it well – and it did. However, some banks of late have behaved more like hedge funds than the traditional boring institutions they have been in the past, and Iceland’s were certainly no exception. In fact, Iceland’s banks became such a dominant force in the country with their leveraged speculation, that the banks were worth roughly 8 times the GDP of the nation itself! Easy come, easy go. Curious, as the nation scrambles to deal with the fallout of their now failed financial institutions – nationalizing banks, guaranteeing deposits, and other similarly dubious measures – it hasn’t exactly been front page news.
The Russians meanwhile, clearly out of the goodness of their hearts, just offered to lend the NATO nation 4 billion Euros. Ironically, it’s essentially a subprime adjustable rate mortgage.
