Iceland's economic miracle turns into default

Iceland's economic miracle turns into default. 44006.gifOn April 9 a referendum was held in Iceland on the possibility of paying five billion dollars to the English and Dutch nationals affected by the 2008 bankruptcy of Landsbanki bank. Over 57 percent of the northerners who showed up at the polls were opposed to paying the debts of foreign investors.

Prime Minister of Iceland Johanna Sigurdardottir did not hide her disappointment with this turn of events. "They have chosen the worst option. The referendum has split the country into two parts. Now we must do everything possible to prevent economic and political chaos, which would be a consequence of this decision," she pointed out.

The reaction of the UK was quick. "We are disappointed that the people of Iceland have rejected what has already been resolved in negotiations," said the British Treasury secretary Danny Alexander. He threatened to file lawsuits against Iceland in international institutions. The officials in the Netherlands were saying the same thing. The amount of the claim is at least 4 billion euros.

This story began in 2008. Then, Iceland became perhaps the world's first victim of the financial crisis. Literally overnight three largest banks in the country have burst, and their debts outweighed the capabilities of the state budget. Among other banks, Landsbanki bank and its Internet subsidiary Icesave have collapsed. As a result, 400,000 citizens of Great Britain and the Netherlands have lost five billion euros.

British and Dutch authorities have offset the losses of all their citizens, and then began pushing Reykjavik, demanding that the Icelandic authorities settle with them. Prime Minister Johanna Sigurdardottir who came to power in 2009 said that the country was ready to commit itself to the debts of the foreigners. She stated that 400 million euros will be paid from the budget and the remaining funds will be obtained through the sale of the banks.

However, many residents of Iceland are not satisfied with this option. They believe the state should not compensate for foreigners, because they themselves are to blame for their plight and being lured with high interest rates. If we were to divide the debt between all citizens of the country, they would have to pay 1300 euros out of pocket each. Given the fact that the country is in a difficult situation, such funds are not there to waste.

In an effort to consider the opinion of the people, the President of Iceland Olavur Ragnar Grimsson posed questions regarding the payments for a referendum. Twice the population rejected the government's plans to pay money to foreign investors. The first time it happened last year, the second time - on Saturday. Now Iceland's commitment to pay its debts is up in the air.

However, politicians in Britain and the Netherlands have their own voters. In addition, they may soon be joined by another one, Germany. As a result of the collapse of Icelandic banks in 2008 German banks were hit, and each of 320,000 Icelanders owes them 70,000 euros. An unpleasant picture is emerging for the northerners - the opposition to two giants and another decent-sized country.

It must be said that the possibility of resistance from the authorities of Iceland is limited. At one time, the country's leadership has transformed the country into the offshore zone and actually lost control over its banking system, which resulted in the country being on the verge of collapse. The rate of local Krona has plummeted; there is enough debt without burst banks. The country could be rescued by loans from the EU and the IMF, as well as the introduction of the euro. That is why Iceland has applied for EU membership.

However, the membership can be difficult. EU representatives made it clear that failure to pay on deposits can put an end to European integration plans of Iceland's authorities. In addition, the veto on the membership of the northerners may be imposed by the UK and Holland. Neither the government nor the people of this northern country are in a good situation. Citizens do not want to pay for the blunders of the authorities and banks, and the Icelandic authorities altogether found themselves between the hammer of the international obligations and the anvil of their own people.

Experts of the School of Economics Maxim Bratersky and Ivan Rodionov commented on the results of the referendum in Iceland, as well as the causes and policy implications of the local banking crisis for "".

"One thing is noteworthy in this story," said Maxim Bratersky. "In the midst of the crisis one Icelandic professor offered help in organizing the negotiations on the possibility of saving his country by infusions from Russia. Mentioning of Russia is clearly not accidental. This to some extent indicates the presence of mutual interest in this story.

Speaking about the reasons why the Icelandic "economic miracle" suddenly turned into a default, it should be noted that the credit institutions that have burst in Iceland promised an incredibly high interest. Many investors believed in it, and eventually got caught into a trap. The crisis has put everything in its place and "blew" these "bubbles" away.

As for the reaction of the freedom-loving Icelanders who had refused to pay the bills, it is understandable to some extent. Bill payment is the job of the banks, not taxpayers who were not involved in their speculations. Of course, such an outcome does not suit the British and Dutch investors who should not have been tempted by all-time high interest rates in the first place. After all, miracles in the economy, as we know, do not happen, not even in the West.

Considering the pledge to take something away from Iceland through a law suit, I do not see any real possibilities here. Well, what can they give? In the best case, one euro invested in an Icelandic bank can return two cents. And that's all. They do not have anything else left. This story must once again teach us that we cannot trust those credit institutions that promise incredibly high interest rates compared to other banks. No matter what country they are in."

"Anyone would do the same if they were the Icelanders," said Ivan Rodionov. "Ordinary people are not to blame for the fact that someone has organized an institution like Madoff's in Iceland. One of the reasons Iceland staged a safe offshore harbor was a desire to attract investment at the time when the country was extremely poor in almost all types of resources. Even this alone was enough for it to not have full sovereignty, and its authorities have attempted to rectify the situation by inflating bubbles.

There is nothing surprising in the fact that this "bubble" has burst. Sooner or later it had to happen. And it happened when the global financial crisis has erupted. There is an entire theory on how these bubbles are bursting. In any case, it is just a matter of time.

With regard to the default, for most of Iceland nothing particularly terrible has happened. In 1998 the Russian authorities declared a default without asking anyone, and no global catastrophe has happened. Here we have the same situation. Another thing is that besides five British billions , 15 billion from Russia also got stuck in Iceland. These were the funds from various sources.

It is no coincidence that in 2009 negotiations were held on the allocation of money to rescue Iceland. In this case it was about the possibility of saving these capitals. This story is evidence that fools who invest money in financial scams live not only in Britain but in Russia as well. And this is after the events of 1998."

Sergei Balmasov
Vadim Trukhachev

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Author`s name Dmitry Sudakov