Sunday Morning Coffee

The New York Times has a write up on a book called Why Iceland:How One Of The World's Smallest Countries Became The Meltdown's Biggest Casualty. The book is written by Asgeir Johnsson who among other things is the chief economist at Kaupthing Bank which used to be the largest bank in the country.

I started writing about Iceland several years ago before the last big burst higher for that market which was then followed by a slow unraveling that then gave way to a spectacular implosion. The draw for me is that its proximity to both continents and geothermal heat make it a logical destination data storage and smelting allowing it to play a larger role in the world economic order. I believe this argument is still in tact but I do not know how realistic it is; when like Michael Vick will Iceland get a second chance?

While the theme above was making very slow progress the country was, as we know now, becoming a massively over leveraged hedge fund of sorts and as meteoric as the rise up was so too was the decline truly astounding. People took out mortgages in euros (maybe some other currencies too) because the rates were much cheaper. As the banks started to blow up for their leverage the krona cut in half in just a few days which doubled the mortgage payments. If you have a mortgage, how jammed up would you be if your September payment was twice what you paid in August?

The big three banks (Kaupthing, Glitnir and Landsbanki) were all much bigger than the economy which meant that there was no way for the country to help should anything bad ever happen which obviously was the outcome. When the banks went under the savings of depositors was gone. Where is your money? Wherever it may be, chances are you trust that the institution won't disappear anytime soon. How jammed up would you be if all your money did disappear and there was no FDIC or SIPC rescue?

According to the NYT article one point Jonsson seems to be making is that the combination of a small population, the currency not being a reserve currency and "limited fiscal capabilities" a financial crisis was inevitable. This line of thought leads him to the idea that the UK and Switzerland are candidates for a similar fate as Iceland. The ability to rescue the banks if they had to would be extremely difficult for those countries compared to the US (you probably read about this repeatedly last fall) but the currencies are far more mainstream than ISK. And while I suppose they could have more problems coming I don't think the "reserve currency" issue stands up. Taken literally, the USD is the only reserve currency so there would have to be many countries capable of collapsing and while Latvia appears on this path it is far less clear that collapse in the UK and Switzerland is a reasonable risk.

Of course you avoid the consequence by not having too much exposure to these places and avoiding their financial companies.

One point of interest to me was the debate of sorts going on in the country whether to return to being more of a resource based economy, as opposed to financial based, or integrate into the Eurozone thus losing some (or all?) of its of its identity. Naively perhaps, I hope they avoid the EU and can figure a way to go it alone. This would likely mean a longer road to real health but I think once achieved would make for a better long term result.

The picture is looking up the main drag in Reykjavik, Bankastræti, towards the shopping area from where all the banks are (were?).