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A Melting Opportunity

cartoon from the Associated Press

In 2008, Iceland suffered damage to its reputation as a global financial powerhouse after being pummeled by the financial crisis. Now, as the country tries to pick up the pieces, it must weigh domestic politics with international relations while deciding whether to pay back Europeans who lost big money through Icelandic banks. Relative to the size of its economy, the Icelandic financial crisis, is the LARGEST in economic history. The effects of the crisis have been severe. Iceland’s currency, the króna, has plummeted. Iceland’s image as a secure haven for financial transactions and investment has been tarnished, to say the least. Now, Iceland’s relations with its largest EU buddies are bursting at the seams.

This weekend Iceland and Britain met to discuss the repayment of over $5 billion in Icelandic bank debts. Britain and the Netherlands are desperate to avoid a March 6th Icelandic referendum which is likely to void a current agreement to repay overseas savers who lost huge sums when Icelandic banks collapsed. Public opinion in Iceland is firmly against repayment. Although most of the debt would be repaid through the sale of bank assets, many Icelanders believe the terms are unfair.

The IMF and Nordic countries have agreed to lend Iceland about $4.5 billion, but most of the loans are contingent on a positive repayment resolution. Until Iceland is able to resolve these disputes, the country remains vulnerable to several major, long- and short-term consequences… These include:

  1. Iceland’s reputation as an FDI destination
  2. Hopes to join the EU
  3. Loss of loans from the IMF & Nordic countries
  4. Damage to European relations

Iceland has more to gain through the repayment of its debts than stubborn refusals. Although public opinion is obviously important, in this case Icelandic officials should do everything they can to avoid the March 6th referendum. The referendum, while quintessentially democratic, looks like a nail in Iceland’s economic coffin.

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Categories: Uncategorized
  1. Gunnar Snaeland
    March 3, 2010 at 12:28 pm

    Ashley

    Thanks for a short report of Iceland´s current situation.

    I disagree on a number of points:

    1) You are assuming that it is right for private financial institutions to give their bill to Governments when things go wrong, and in turn that it is right for Governments to make their Constiuents to foot the bill for bad management and faulty regulations. – this is not a law of nature but actually an abomination of the notion of collective responsibility.

    2) Times are tough in Iceland but a growing number of us believe that the right way to solve our problems is to work our way out of the situation rather than by counting on international financial networks.

    3) There is a vast majority of Icelanders against EU membership, and Iceland does not have a lot of vital intersts that are better served within the EU than by bilateral relations with other Countries.

    4) The Icesave referendum is important for a moe important reason: The right of a people to defend themselves against bad decisions by incompetent politicians.

  2. March 3, 2010 at 1:23 pm

    Thank you for commenting! It is great to hear the Icelandic perspective.

    While your points are enlightening, it seems to me that any decision will have to be a balance between public opinion and the long-term outlook. I agree that the public should not have to pay for the mistakes of the private sector, if only because this could create a moral hazard. But, if the mistakes or failings of the private sector affect FDI, interest rates, and the currency value, won’t the public still be paying for the mistakes of the private sector, maybe even in a bigger way for a longer period?

  3. Gunnar Snaeland
    March 3, 2010 at 1:45 pm

    I am not an economist, but some say that in the wake of the Icesave dispute, suddenly Iceland gained ca. 60.000 more Economists.

    We simply have been forced to look at a situation that most of us had been unaware of for a number of decades.

    Interest rates in Iceland are probably the highest in the western world today and so they have been at least for a number of decades. Our economy has been one of fluctuations throughout history and personally I accept this situation which is, in my opinion, inevitable.

    We need to address this problem on a local basis and adjust to the international scene as things progress.

    You are right in worrying about the interest rate, because I think that the higher the interest rate is, the easier it is for financial istitutions to make bad decisions.- this probably is an international problem.

    As for the moral hazard is concerned I think that it has been become painfully obvious to everyone that has a free mind that the Icesave dispute highlights the obvious faults of the current economical system – The people resposible for our problems are getting a free ride while innocent people are paying full price – with interest.

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