Skip to content

Too big to bail out? Iceland’s payback put on ice

March 12, 2010

Add to FaceBookAdd to Google BookmarkAdd to Twitter
Normally you wouldn’t expect a national referendum in Iceland to make international headlines. Last Saturday, however, Icelandic voters rejected a plan by their government to repay a 5,3 billion loan to the Netherlands and the UK. And the world paid close attention.

In 2008 Icelandic Internet savings bank Icesave attracted billions in deposits from Dutch and British citizens by promising them sky-high interest rates. Later that year Icesave filed for bankruptcy as a result of its bankers’ bad, complicated and leveraged investments, mostly on real estate.

By then Iceland’s economy was already hit hard by the nationalizing of three banks and the fall of the Króna, the national currency. The Icelandic government – that collapsed over the financial crisis in January of 2009 – did not have the money to bail out Icesave. So the Dutch and British did, thereby securing reimbursement for their citizens. But now that the Netherlands and the UK want their money back, the vast majority of the Icelandic population voted against their government’s payback plan.

Basically, the plan would require each Icelandic household to put in the equivalent of $135 a month for eight years, totaling a quarter of an average year salary. Icelandic people argue it is unfair to make them pay for their own government’s failure to restrain the recklessness – may I add greed – of a handful of bank executives. And for the ignorance – may I add lack of judgment – of the people they mislead.

The unfolding of events in Iceland is not that much different from what we have seen happening in the US – be it on a considerably different scale. As a comparison, the numbers Iceland faces would equal the US government taking on a debt of 5 trillion. And though that may sound astronomical, in reality the US bailout tab is already close to 2 trillion as calculated by the New York Times. Moreover, the US government has obligated itself to pay out $12.5 trillion more if things get worse.

Back to Iceland now. With unemployment rates rising, a crashed Króna and public services decreasing, the Dutch and the British are expected to soften their payment terms. Sooner or later though, the bill will come due. And one way or another the 300.000 Icelandic taxpayers will be paying ‘their’ share of it, as will the roughly 200 million taxpayers in the United States.

And those in many other countries for that matter, including The Netherlands, Belgium, Germany and the UK where banks too big to fail were bailed out by their governments – without much public consultation at all. Now the question that remains is “have we learned?” Let’s pay close attention.

No comments yet

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: