Learning from Iceland

In the past couple months, the term Iceland has become synonymous with economic havoc. All of Iceland’s major banks, their currency, and their stock market, collapsed within a matter of weeks. The citizens of pastoral Nordic nation awoke one morning to find their savings evaporated, their salaries slashed, their homes and investments devalued. What led to this shocking calamity, and what can we learn from it?

1. Currency Bubble – Speculative investment in the Krona had reached bubble proportions. Having such a small currency so heavily over-invested invited an abrupt fall, as foreign investors, who held the vast majority of the currency, had no compunctions about unloading it at the first sign of trouble.

2. Outgrowing your Country – Banks in Iceland had outgrown themselves and their country. According to some estimates, they were endebted to foreign creditors and depositors at a level equivalent to €160,000 per individual Icelandic citizen! Clearly it was not realistic for the Icelandic government, whose budget derives from the collection of taxes, to provide meaningful insurance on these deposits.

3. Bad Fences Make Bad Neighbors – Icelandic banks operated branches in Europe that were not properly structured in order to be independent from their parent institutions. As a result, they were ineligible for insurance or assistance from the British or European banking authorities. A very acrimonious debate erupted between the British and the Icelandic governments when Iceland intimated that it would not guarantee the deposits of non-Icelanders, and Britain retaliated by seizing the assets of those branches which operated on English soil.

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