A couple of years ago, I wrote a piece in the Fin about the precarious economic situation in Iceland, a small country with a massive current account deficit. Now it appears, the full-scale implosion I talked about has come to pass. Rather startlingly, Iceland is looking to Russia for a bailout. Among the implications noted by Felix Salmon, the fall of the S&P index below the 1000 level it first reached back in 1997.
As I say in the article, Australia is much less vulnerable than Iceland. Still, it is now clear that the consenting adults theory of current account deficits has its limits. We’ll just have to hope that we are within those limits, and that we can turn the recent trade surplus into the beginning of a sustained reduction in our net foreign debt.
John Quiggin 
I think this article omits probably the most critical part of the Icelandic situation – Icelandic banks expanded overseas to the point where their overseas businesses were several times larger than teir home operations.
When the liquidity crisis hit, the Icelandic government simply didn’t have sufficient assets to do so.
It seems to me that the countries which need to be most concerned are those which have extremely large banking sectors relative to GDP – Hong Kong, Luxembourg, Switzerland and Lichtenstein coem to mind.
The popular wisdom that a sovereign government is automatically more credit-worthy than any bank it regulates needs to be revisited when dealing with big banks in small countries.
British depositors in Icelandic banks almost definitely exceed the population of Iceland.
“Consenting adult theory”. Indeed, another element in the great march forward to the 19th century under the leadership of a couple of famous, erudite, and Nobel (Bank) Prize winning ‘text theoreticians’ (a crucial characteristic) and their many apostles.
The theory works well for situations where people take on debt that they will be able to pay back. Does not say much for cases which lead to large scale default.
John, since deregulation in the 1990s the combined foreign liabilities of Icelandic banks is in excess of $100 billion and is a real basket case when you compare that to the country’s GDP of $14 billion.
I’m in the UK at the moment, and the collapse of Icelandic banks is big news here, featuring in every news bulletin. Apparently there are over 300,000 “Icebank” customers in the UK alone.
A notice on Icesave’s website said: “We are not currently processing any deposits or any withdrawal requests through our Icesave internet accounts. We apologise for any inconvenience this may cause our customers. We hope to provide you with more information shortly.â€?
“British depositors in Icelandic banks almost definitely exceed the population of Iceland” No they dont, there are 300k savers and 360K Icelanders, but I take your point.
In essence Iceland turned itself into a hedge fund, don’t worry about them they have plenty of cod to live on and as soon as we work out a way of storing power from its natural power sources which are beyond imagination, which I would have securitised future revenues from hydro and geo-thermal power generation to deal with their current mess, they will be nordic arabs.
One good thing though is, it was very expensive place to visit, a beer would cost a tenner, so now the place will be a lot cheaper and the fishing is outstanding as well as the place in general (top gear do a lot of their filming and testing there) , so ill be going a lot more.
swings and roundabouts hey? :0)
The stated number of UK depositors with Icelandic banks varies widely between news sources.
Icesave, the UK arm of Glitnir seems to have had approximately 300,000 UK customers with another 150,000 with Kraupthing Edge.
http://www.independent.co.uk/news/business/news/moves-to-protect-uk-customers-as-bank-shuts-955089.html
This Icelandic Saga is strange indeed. Now, the UK government has frozen (appropriate word) Iceland’s assets in the UK. They have done this under their Terrorism laws! This illustrates the sweeping nature of said laws and the ways in which they can be used and misused.
Iceland’s Prime Minister is aghast. In fact, the saga demonstrates how relations between nations can (and will now) turn rapidly nasty when great sums are being lost. I wonder, if the failure of a US, Russian or Chinese set of bank branches in the UK caused similar problems would the UK freeze their assets? Of course they would not, for the UK is to the superpowers as Iceland is to the UK.
The biggest killer whales in the ocean (to continue the icy theme) will do what they wish in this crisis and the small fry will get eaten.
By the same token, Iceland has clearly been very foolish and (in an empirically inevitable sense) they had it coming.