Over the last 2 weeks, Icelandic banks were caught by the unwillingness of other banks to continue to lend capital on overnight markets. Taking advantage of liberal credit and deregulation, Icelandic banks had been amongst the most aggressive in expanding to Europe. With a small local economy, heavily leveraged expansion overseas was the only way to amass a fortune. They had amassed debts of approximately 12 times the GDP of Iceland. When foreign investors panicked and attempted to get ride of Icelandic assets, after the collapse of Landsbanki Icesave. Technically, Iceland is bankrupt and is one of the rare democracies to collapse economically. It will have to turn to the International Monetary Fund. Stratfor comments:
The government of Iceland promised to repay Icelandic depositors in the island country’s failed banks. They did not extend the guarantee to non-Icelandic depositors. Partly they simply didn’t have the cash, but partly the view has been that taking care of one’s own takes priority. Countries do not want to bail out foreigners, and different governments do not want to assume the liabilities of other nations. The nature of political solutions is always that politicians respond to their own constituencies, not to people who can’t vote for them (www.stratfor.com)
The result was that other, nationalized, Icelandic banks such as Kaupthing’s funds were frozen in the UK under emergency measures contained in recent Anti-Terrorism legislation and assets immediately sold off to the Danish bank ING. While individuals were protected, up to 20 UK councils and numerous charities could lose millions.
This is where the blood flows: Disappointed that European and western allies failed to provide support, and that it had been made a scapegoat by UK politicians Iceland accepted a loan from Russia of about 4 Billion Euros. In effect, the lack of clarity and guarantees were used as a excuse to push the Icelandic financial sector and the economy into ruin.
However the spectacle of an overleaveraged Icelandic krona against a small island economy and population of only about 313000 suggests to some that other nations might be similarly overleaveraged. In an online discussion, a user ‘Truth Conquers’ speculated,
Actually, we might be just as broke as Iceland is. No one knows how big the CDS “House of Cards” really is. But I have seen estimates of at least 5 trillion. And estimates usually under guess these sort of things. And that does not include foreign banks, credit card debt, car loan debt, companies needing short term loans and FDIC coverage of banks. You get the idea.
Via such rumours, no country is immune from appearing virtually bankrupt, regardless of the actual state of its economy. Here I mean the virtual in a bookish, philosopher’s sense of not an imagined abstraction but a real thing that nevertheless can’t be seen or touched, for example a brand, nation or community. Trust may be a real ‘thing’ but it is intangible and can be manipulated. Historically one important way of controlling such real-but-intangibles or ‘virtualities’ is through ritual – think witch hunts, sacrifice and scapegoating. These are the ultimate terror. Indeed, John Raulston Saul commented that this is a worry for Canada as an supplier of ‘dirty oil’ facing the United States and Europe who may want to rebuild their financial relationship and power. Iceland was sacrificed. It was made a virtual scapegoat regardless of the actual nature of Iceland and of actual cost to British local taxpayers and its implication for UK urban infrastructure, volunteer services and agencies.
This is a geopolitical coup for Russia and (despite chaos in its markets) a reversal of its position: 20 years ago it was in economic collapse. Wall Street Journal’s online ‘Marketwatch’ said ‘The world has gone upside down’. In a sense, we need to turn our globes upside down too. What does it mean to say that iceland is at the centre of the financial crisis this week? This is a metaphor for the way that a new geopolitics – and a whole re-spatialisation of where we assume the centre of our maps – is an outcome of the current financial crisis, which as of today is widely being called a ‘crash’.
In the 20th century, the significance of Iceland was in relation to fish and Atlantic sea lanes – and this continues, perhaps in relation to the ability to monitor submarine tracks? In the 21st century the significance is its relation to oil, gas and Arctic sea lanes which will emerge as polar ice melts. In effect, Russia moves towards enhancing its position amongst nations involved in the Arctic. Iceland may offer a point from which power can be projectied into what is becoming open ocean north of Iceland and Greenland.
-Rob