The Collapse: So Falls the First Country

From the BBC:

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The best way of seeing Iceland is as a country that turned itself into a giant hedge fund.

For years it paid higher interest rates than in many parts of the world, so its financial institutions borrowed a ton of hot money from abroad, which they then re-cycled into investments all over northern Europe, including the UK.

The Icelandic banking boom was an economic phenomenon created by what's known as the carry trade - whereby colossal sums of money were borrowed in places like Japan, where interest rates were effectively zero, for lending to institutions in high-interest-paying economies, such as Iceland.

This, for years, seemed to be a no-lose arbitrage on differential interest rates in a globalised economy.

But it was just another manifestation of the pumping up of the credit bubble, which is now deflating and hurting us all.

Here are the lethal statistics about Iceland: the value of its economic output, its GDP, is about $20bn; but its big banks have borrowed some $120bn in foreign currencies.

Now that's what I call leverage - and remember that's just the overseas liabilities of its commercial banks.

If this were a business, and if it had no other borrowings (which of course Iceland does have), this would be a debt-to-ebitda ratio of 6.

Or to put it another way, Iceland simply doesn't have the domestic earnings to service this kind of debt...

Which is why if the Icelandic Government were to formally underwrite all these liabilities - which it might just have to do, given that other banks and financial institutions no longer want to touch Iceland with the longest barge-pole ever constructed - well its national-debt-to-GDP ratio would be at a level that make the UK in the 1970s look like a model of prudence.

And if Icelandic taxpayers actually had to service all that debt, well there wouldn't be a lot left over for even the basics of life.

It's a proper old mess...

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Please read the rest of the brief article, along with the comments.

Any guesses on who might have the combination of geopolitical ambition and financial means to "help" the Icelanders?

In olden times, I might say a Bear - but now, a Dragon sitting astride the GIUK gap seems much more likely.

Oh, and by the way - that six-to-one, $20 billion GDP to >$120 billion debt ratio cited above as enough to drive a sovereign nation to its knees?

Consider these facts:

Current annual US GDP per official Department of Commerce statistics: ~$14.3 trillion dollars

Current US national debt per official Department of Treasury statistics (not including any impact of the Fannie Mae/Freddie Mac and TARP/Wall Street bailout costs): ~$10.1 trillion dollars

Unfunded future Federal government liabilities as of 3/08, per official presentation of now-former US Comptroller General David Walker: ~$52.7 trillion dollars

Reference to updated FedGov unfunded liabilities total per paragraph 30 of this speech given on 9/25/08 by Dallas Federal Reserve Board CEO Richard W. Fisher and also paragraphs 10-24 of this previous speech by Fisher on 5/28/08: Between ~$80 trillion dollars (9/25 speech) and $99.2 trillion dollars (5/28 speech)

Just keep repeating to yourself:

The economy is fundamentally sound; BushMcBama Pelosi-Reid wouldn't lie to me.

The economy is fundamentally sound; BushMcBama Pelosi-Reid wouldn't lie to me.

The economy is fundamentally sound; BushMcBama Pelosi-Reid wouldn't lie to me.

War is Peace.

Freedom is Slavery.

Ignorance is Strength.

Tempus fugit.