For many recent years, Iceland was touted as the new model for Europe. Investment poured in at record levels, lifting the entire economy of the small island nation. The geo-thermal energy was offered as an excellent power source for heavy industries such as smelting, while the onshore banking industry was presented as the new breed.
The local currency, the krona, was riding high while the government offered an environment where interest rates were much higher than other nations. The nation was splashed across the financial press as the next business center.
It only took six months for all the optimism to dissolve and the island to adopt a siege mentality. Government officials and the local press blame unscrupulous speculators for the meltdown that has left the nation’s financial infrastructure on the brink of ruin. The krona has sunk 25%, the stock market 40%, inflation has sky-rocketed, and the local interest rates sit as an unpleasant 15.5%. It is obvious that the island’s central bank does not have the liquidity strength to bail out any of the nation’s larger floundering banking institutions, effectively leaving banks un-backed. Bear Stearns recently suggested the tiny nation was about as safe an investment as Kazakhstan.
Consumer spending has slowed to a crawl as on-shore prices has risen greatly in the import driven economy. There is increasing recognition that the growth over the past few years was the classic definition of a bubble, however few in power are prone to admit it. Instead the leaders blame the demise on outside speculators with a Vegas mindset who want to make a profit on the pain of the nation.
In the past, Iceland was hailed as the new model of success. Now the fear is that mainland Europe will follow the model of this small nation, and crumble on a mass scale. Iceland may only be the leading edge of a cycle of credit defaults that will rip the European financial system asunder.
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Wednesday, April 23, 2008
The Meltdown: Iceland
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It is obvious that the island’s central bank does not have the liquidity strength to bail out any of the nation’s larger floundering banking institutions, effectively leaving banks un-backed.
Do you perceive our problems to be as big (40% stock decline, 25% loss in USD value) ? And if big banks are so insolvent and FDIC insurance turns out to be a hoax (is this possible), then we have a situation where money in bank is not safe. What do people do in times like that ? Stuff cash under pillow ? I would also suspect law and order situation to be pretty bad - civil riots/unrest. Any comments ?
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