Bailout

Iceland stands up to bullies

By Felix Salmon

There’s a reason why people are often reluctant to stand up to bullies, especially when those bullies have an enormous size and strength advantage and are credibly threatening to hurt you very badly. And so it’s going to be very interesting to see what happens now that Iceland’s figurehead president, Olafur Grimsson, has suddenly decided to cause a major international incident by vetoing a bill which would have put his country’s citizens into billions of dollars in debt to bail out the UK and Dutch governments.

In principle, I’m with Mish on this one: if you’re the president of a country where 70% of the population opposes the bill and 20% have signed a petition urging you to veto it, the noble course of action is clear.

But the UK, especially, is playing hardball, threatening Iceland with financial isolation. And as Dan Drezner says, “total isolation from the global financial system is not a fun experience, Great Recession or not”.

The threat of Iceland dropping off the face of the financial world is a real one, and the country’s bonds have been downgraded to junk status as a result. It’s really that bad: the ratings agencies have downgraded Iceland for not taking on an extra 40% of GDP in new debts.

I’m quite ashamed of the bullying tactics being used here by the UK government. What happened was that an Icelandic bank, Landsbanki, started attracting UK depositors through its Icesave brand. When Landsbanki failed, the UK government bailed out those depositors in full. And now it wants that money back from the Icelandic government, which never guaranteed the Icesave deposits. If you thought the cod wars were bad, this is much worse.

If the UK were picking on a country its own size, here, I wouldn’t feel so bad. But Iceland is tiny, and has no real means to fight back, other than essentially saying “OK, then, hit me.” Which is what it’s just done. I hope that the UK doesn’t follow through on its threats — even if that means damaging its own credibility going forwards.

Full post as published by Macroprudential on January 06, 2010 (boomark / email).