Iceland

The gigantic experiment in globalization may be about to turn ugly in a classic Jekyl and Hyde type scenario.

In previous blogs I wrote about the fragility of the economy in Iceland. For the past several years, global financial players have been flooding the Icelandic banking system with capital in order to cash in on the higher interest rates being offered. In other words, the classic "carry trade" was at work. The bloated banking system started lending this capital to individuals who predictably went on a spending spree and to corporations who likewise went on an acquisition spree. I can think of 2 major firms right here in Canada that were acquired by firms from Iceland. I can recall thinking at the time – Iceland?, where are these companies getting the money to come to Canada to make acquisitions? But now, this money is seeping out of the system in response to the recent financial turmoil in the global banking sector. In an effort to stave off this outflow, interest rates in Iceland have risen to 15%. The backlash has resulted in the currency shriveling and the trade deficit ballooning. Read more »

In a previous blog I introduced the issues currently playing themselves out in Iceland. What amazes me is now the North American media hounds have not been barking at this story while their media counterparts in the UK have been all over it like a wet blanket.

To recap, Iceland's 313,000 inhabitants enjoyed an unparalled econonomic boom over the past ten years with GDP growth averaging over 9% a year. Soaring fish prices and the development of a world class logistics industry played a role in this boom. The banking sector got in on the action as well. With interest rates higher than in other nations, the Hedge Fund crowd quickly realized the potential for a carry trade - borrow in Japan and park the money in Iceland to capture the interest differential. The banking system, flush with cash, then started lending abroad. In fact total lending abroad accounts for 60% of banking activity. Read more »

Iceland is bracing for a meltdown of perhaps epic proportions. No this is not a blog about Global Warming.......

Iceland is headed for some serious financial problems. The time for pointing fingers has long since passed. It can be fairly concluded that Hedge Funds, Bankers and Politicians are all to a large degree guilty of letting the situation get this far. What the world needs right now is some swift action. If these financial issues are not handled properly, the spillover effects could be disastrous and could set off a domino type effect that will ripple around the globe. Read more »