The Iceland Cometh

What's the 2008 equivalent of the Dutch tulip bulb boom and bust in 1637, which reverberated across Europe with disastrous results after single Viceroy bulbs rose to a price equivalent to US$1,250? My vote goes to Iceland. Not only have all the tiny nation's three major banks - Landesbanki, Kaupthing and Glitnir, failed, but they left a trail of debt some 10 times bigger than the country's entire gross domestic product.

Quite clearly much of this, mostly owed to foreigners, will never be repaid regardless of whatever austerity measures the government in Reykjavik imposes. But don't blame the Icelanders. Don't blame the madness of crowds. Blame all the financial institutions, all the central banks, particularly the Bank of England, European Central Bank and those of Scandinavia for having allowed this situation to develop.

They are responsible for ensuring that banks operating in their territory either come under their direct jurisdiction or are subject to regulation by credible authorities in their home country. However, they have continued to dither for 10 years, refusing not only to properly supervise the institutions under their control but also by neglecting to put in place a crisis management package that could be used to restore confidence in the banking system. Instead, in the current crisis they have continued to seek to protect their own turf instead of setting aside old national issues and acting in a coordinated manner to preserve their portion of global financial stability.

As early as April, while the financial world was still sleeping about the cataclysm that was about to be visited upon it, the Icelandic currency had already lost a quarter of its value against the euro amid rumors of a growing crisis.

It should have been obvious to anyone who knew the slightest amount about the huge balance sheets of the three Icelandic banks which had gone on a amazing expansion spree in Europe that there was no way in the world that Iceland's central bank had the ability to supervise or if necessary take responsibility for banks with assets many times the nation's GDP.

But the geniuses at these central banks, not to mention the Bank for International Settlements in Basel and the International Monetary Fund, seem to have been not the least bothered with the situation or tried to impose reasonable limits on the banks' expansion. The banks in turn loaned heavily to various Icelandic investment houses which sprang out of almost nowhere to buy up assets ranging from a well-known British retailer to stakes in an American airline.

No wonder the financial world is in such a mess. No wonder that British taxpayer will have to fork out another few billion pounds sterling to cover the retail deposits made there to the Icelanders. No wonder too that Russia has chosen this moment to cosy up to Iceland and offer aid to a struggling NATO member which till quite recently was host to a US base.