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How the 'Nordic Tiger' lost bite and might
By Ni Tao |
March 13, 2010, Saturday
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Print Edition
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LAST Saturday, Icelandic voters flatly rejected a government deal to repay British and Dutch depositors the equivalent of US$5.3 billion lost in the devastating meltdown of the country's banking industry in 2008.
In a closely watched referendum, a staggering 90 percent of voters opposed the bill, dealing a serious setback to the Icelandic government's plan to compensate foreign depositors for their loss. This defeat may further damage the nation's credit ratings and hinder its access to aid money from the IMF.
The bill, which would saddle every Icelander with a debt of about US$17,670 if passed (Iceland's population is a mere 300,000), predictably raised the ire of voters. Images of Icelandic protesters swarming in the streets are relayed by satellite television to every corner of the globe.
"Outrageous" was the word that summed up how voters felt about the politicians' alleged transgressions -- these people got us here, now they want us to clean up the mess they created. Outrageous, indeed.
From a far-away country that until recently was only associated with fish, thermal springs and long sunless days due to its proximity to the Arctic, to one that teetered on bankruptcy when the global economic pandemic hit, the abrupt change of Iceland's fortunes makes what will be a fascinating legend.
In his book "Meltdown Iceland," author Roger Boyes takes readers on a journey to the troubled country for a hard lesson that might prevent similar debacles in the future.
Unlike some Western countries that embarked on a path of liberalization and deregulation in the 1980s, Iceland was a latecomer in the game. It did not experience massive waves of privatizations until the 1990s.
If geography is destiny, Iceland is dealt a weak hand. But the country played its cards boldly enough to enable this minnow to swim alongside the whales like America and Britain, where the economic liberalization drive originated.
Iceland then took a series of far-reaching steps to diversify its economy from fishing and sightseeing and make it an attractive destination for foreign investment. State companies were sold, the corporate tax rate was cut and financial sector was tapped for new and "easy" growth, Boyes notes.
But all these measures to reform an economy the size of Iceland's miss a key point: without the support of sturdy economic pillars, for instance, a reliable amount of foreign currency reserves, Iceland's modernization gambit could fall prey to predators, namely, speculators.
Iceland's political and economic elite made no secret of their ambitions for their small country. They wanted to turn it into a "Nordic Tiger" that would even overshadow Sweden, the Scandinavian star of high-octane growth. By privatizing its banks at a speed that filled its own citizens with vertigo and unease, Iceland set the stage for future trouble.
To lure foreign capital, Icelandic banks, notably Landsbanki and Bunadarbanki, set their interest rate at 15 percent, almost five to six times as high as most countries' interest rates. This move fueled pervasive speculation.
Since lending to their domestic customers doesn't make much economic sense, Icelandic banks recklessly extended loose credit to foreigners. Meanwhile, the regulators exercised virtually no oversight.
Alarms were raised when bubbles in the global market showed early signs of bursting. Wallowing in their newfound wealth, Icelandic financial institutions didn't take seriously the outside warnings of a systemic meltdown. All they craved was more profits.
Ordinary Icelanders, who are said to be 300 percent wealthier after the reform, also have themselves to blame for plunging into a financial abyss. They bought into bubbles without restraint. Easy credit enabled them to pursue a spendthrift lifestyle. Traditional Nordic values such as thrift and moderation were readily cast aside in favor of consumerist pleasures.
The nation's capital, Reykjavik, "hummed with fancy cars, upscale shopping and a raucous party scene," the Wall Street Journal reported on March 8. This is the same city that only two decades ago was no more than a sleepy, frigid outpost in the North Atlantic.
As many economic prophets have noted, greed is always capitalism's undoing. Iceland's fiasco once again demonstrated their prescience.
In a closely watched referendum, a staggering 90 percent of voters opposed the bill, dealing a serious setback to the Icelandic government's plan to compensate foreign depositors for their loss. This defeat may further damage the nation's credit ratings and hinder its access to aid money from the IMF.
The bill, which would saddle every Icelander with a debt of about US$17,670 if passed (Iceland's population is a mere 300,000), predictably raised the ire of voters. Images of Icelandic protesters swarming in the streets are relayed by satellite television to every corner of the globe.
"Outrageous" was the word that summed up how voters felt about the politicians' alleged transgressions -- these people got us here, now they want us to clean up the mess they created. Outrageous, indeed.
From a far-away country that until recently was only associated with fish, thermal springs and long sunless days due to its proximity to the Arctic, to one that teetered on bankruptcy when the global economic pandemic hit, the abrupt change of Iceland's fortunes makes what will be a fascinating legend.
In his book "Meltdown Iceland," author Roger Boyes takes readers on a journey to the troubled country for a hard lesson that might prevent similar debacles in the future.
Unlike some Western countries that embarked on a path of liberalization and deregulation in the 1980s, Iceland was a latecomer in the game. It did not experience massive waves of privatizations until the 1990s.
If geography is destiny, Iceland is dealt a weak hand. But the country played its cards boldly enough to enable this minnow to swim alongside the whales like America and Britain, where the economic liberalization drive originated.
Iceland then took a series of far-reaching steps to diversify its economy from fishing and sightseeing and make it an attractive destination for foreign investment. State companies were sold, the corporate tax rate was cut and financial sector was tapped for new and "easy" growth, Boyes notes.
But all these measures to reform an economy the size of Iceland's miss a key point: without the support of sturdy economic pillars, for instance, a reliable amount of foreign currency reserves, Iceland's modernization gambit could fall prey to predators, namely, speculators.
Iceland's political and economic elite made no secret of their ambitions for their small country. They wanted to turn it into a "Nordic Tiger" that would even overshadow Sweden, the Scandinavian star of high-octane growth. By privatizing its banks at a speed that filled its own citizens with vertigo and unease, Iceland set the stage for future trouble.
To lure foreign capital, Icelandic banks, notably Landsbanki and Bunadarbanki, set their interest rate at 15 percent, almost five to six times as high as most countries' interest rates. This move fueled pervasive speculation.
Since lending to their domestic customers doesn't make much economic sense, Icelandic banks recklessly extended loose credit to foreigners. Meanwhile, the regulators exercised virtually no oversight.
Alarms were raised when bubbles in the global market showed early signs of bursting. Wallowing in their newfound wealth, Icelandic financial institutions didn't take seriously the outside warnings of a systemic meltdown. All they craved was more profits.
Ordinary Icelanders, who are said to be 300 percent wealthier after the reform, also have themselves to blame for plunging into a financial abyss. They bought into bubbles without restraint. Easy credit enabled them to pursue a spendthrift lifestyle. Traditional Nordic values such as thrift and moderation were readily cast aside in favor of consumerist pleasures.
The nation's capital, Reykjavik, "hummed with fancy cars, upscale shopping and a raucous party scene," the Wall Street Journal reported on March 8. This is the same city that only two decades ago was no more than a sleepy, frigid outpost in the North Atlantic.
As many economic prophets have noted, greed is always capitalism's undoing. Iceland's fiasco once again demonstrated their prescience.
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