Friday, January 8, 2010

The British-Iceland War

Not really, but things are heating up between the two countries.

To review, last February I blogged how Iceland got in over its head by running up the national debt—to approximately 6x of its GDP. Iceland was the pizza boy that bought the McMansion. Doing so did not meet with much opposition because the government freely shared it with the public in terms of generous subsidies. No doubt, Icelanders must have felt they were prospering. The English and the Dutch were happy to lend Iceland money because they offered such rich interest rates—around 15% at a time when in the United States you were lucky to get 3%—and this was all insured by the governments of England and the Netherlands.

But unsustainable government spending eventually reaches its limit. This Ponzi scheme met with sudden collapse where there was a run on Icelands banks as people quickly tried to withdraw their money. The British depositors will be made whole thanks to their government and the British tax base. But there are major powers in play who want their money back from Iceland.

So lately the Iceland legislature has been working on a repayment scheme that would cost the people of Iceland about $16000/head, and more than that if you just count the taxpayers. A hefty sum to be sure, but keep in mind each American taxpayer owes about $90,000 on our national debt. My opinion is: the legislature's plan does not sound wholly unreasonable.

But it still met with widespread public opposition in Iceland, and recently, the president of Iceland veto'd the legislation [1]. Though he denied this intention: effectively this amounts to declaring bankruptcy [2].

So, Britain effectively seized Icelands assets using an anti-terrorism law from 2001 [3]. So is Iceland a terrorist state?

Since viking days I would say the people of Iceland have been a pretty peaceful lot. My experience with them has been EVE online and communicating with the central bank about a question I had—where I got a prompt, courteous, and informative reply, something I wouldn't necessarily expect from the Fed. I think I could hang with those guys.

But like I predicted back in February, Iceland will not be let off the hook easy.

1. Iceland President Vetoes Collapsed Icesave Bank's Bill to UK.
2. Iceland's Government Says it Won't Default; is talking with IMF.
3. U.K. Used Anti-Terrorism Law to Seize Icelandic Bank Assets.

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