Monday, March 8, 2010


A few years ago we took a great trip to Iceland. We hopped around the island hiking and traveling to remote locations from black sand beaches to an inactive volcano rim to tiny towns tucked in nordic style locations on the water.

The year after, Iceland went bankrupt. The Cliffnotes version is that Iceland's three largest banks offered above market interest on deposits, borrowed in the public markets and lent the incoming funds out in a very aggressive manner to speculative borrowers.

The overleveraged borrowers who overpaid for assets all of a sudden could not service their debts. Then the great asset bubbles deflated and the borrowers could no longer pay back the banks. The three largest Iceland banks, that somehow grew to 10 times the size of Iceland's GDP, failed.

The Iceland kroner crashed as did the banks and the Icelandic economy. Google the Financial Times for a good series on Iceland. One bank was an internet bank, Icesave. Icesave had attracted over $5 billion of deposits from UK and Dutch depositors. Of course when the banks failed, the tiny Iceland deposit insurance fund was instantly bankrupt.

What did the UK and Dutch governments do? They reimbursed all their citizens deposits with Icesave? Why would they do this? They were not UK and Dutch obligations. Hey, all those "innocent" depositors were getting an above market interest rate. Did they think there was no risk?

So, the UK and Dutch governments now want Iceland to repay the $5 billion. In today's jaded financial world, $5 billion sounds like a rounding error. It is only $5 billion. Let me show you how much $5 billion is to Iceland.

Iceland only has 300,000 citizens. That's right, 300,000; about the size of Cincinnati. So $5 billion amounts to $18,000 for each citizen. Not each family, each citizen. So on Saturday, the citizens of Iceland voted on whether or not to ratify an agreement made by their government to repay the UK and Dutch governments. They voted 93% against paying them back. 93%!!!!

The UK and Dutch governments have pledged to keep Iceland out of the EU. The IMF has threatened to hold back more loans to try to stop Iceland's freefall. The threats fell on deaf ears.

I can hear the Icelanders at the polls now. 'I have a family of four. I am not voting to take on $76,000 of debt because some bankers took deposits, paid themselves big salaries and then lent the money to companies that couldn't pay them back. So they won't let us into the EU. Big deal. And so what the IMF won't lend us money. The money Iceland borrows is just to repay the money all the banks borrowed and threw away.'

This referendum appeared to be a way the Icelanders could finally show how frustrated and angry they are at all involved. The way out? That will take a much longer blog.

But here is today's thought. How many more countries will go through an Icelandic event?


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