Thursday, August 27, 2009

The Debts of the Spenders: Is Iceland the Tip of the Iceberg?

Iceland was THE poster child for a deflating bubble. During last year's credit crisis, the Icelandic government collapsed amid a bailout of several banks. Regulators were forced to nationalize 3 of the nation's banks in order to repay the high yield checking accounts of millions of British, German, and Dutch customers. There were widespread demonstrations and even rioting in parts of the country.

However, fast forward to today. The country is largely peaceful even as unemployment continues to creep upwards.

But the Financial Times paints a different picture. The idyll was bought at a price. Come this fall when the brief summer skies retreat in the face of grey winter, this storm tossed isle in the middle of the Atlantic will face a potential reckoning: freezes on mortgage payments are due to end, government spending will be cut by 20-30 percent, high interest rates (> 12%) will remain, and the summer business boom in tourism gives way to the cold tundra.

Are there any lessons here for the UK or America? Possibly. But then again, key differences remain such as the ability of both nations to draw on greater amounts of capital from foreigners (e.g. better access to Asian and Middle Eastern lenders).
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