Tuesday, 27 January 2009

Iceland on the Carpet!

It was on the ropes for quite a while, but now it is on the carpet and the countdown is over: after last October ´s Banking system collapse, now the Government resigns amid widespread protests. Prime Minister Geir Haarde announced the resignation of his cabinet, after talks with coalition partners failed. New elections will take place in May.

Local banks, accumulated debt during years of rapid expansion, and now owe about six times the country's annual GDP. Money from all over the world flocked into Icelandic banks chasing interest rates of over 10%.

Iceland enjoyed all the benefits of being of the world´s most prosperous countries until 2007. By 2008 the signs of an impending meltdown were conspicuous. The crisis intensified in the last few days, leading the Government to resign. Iceland’s banks were highly over leveraged and deep in debt, after massive expansion abroad, in particular in the UK.

It is stunning to see a first world country collapse so swiftly!

But this may be just the start of something bigger. Inside the Eurozone, particularly in the peripheral countries, several economies suffer from chronic imbalances, usually blamed on lack of structural reform and debt from excessive state spending.

Detail of 1000 Icelandic Kronur bank note