Iceland's Economy Goes South
Posted: Saturday, January 10, 2009
by Walter Rhett
Charleston Perlo
orvaratli photo/flickr (reprinted under creative common license)
Iceland collapsed.
Not physically, the massive glaziers that sit upon top of the volcano plain of this island, located just south of the Artic Circle, have not cracked and rumbled. The continent-wide tectonic plates of Europe and North America that create Iceland's beautiful ridges and a natural amphitheatre along their intersecting rift have not shifted to cause giant earthquakes or shaking upheavals of the earth's crust.
Tectonic plate rift, (below,)left foreground),America, left; Europe, right
orvaratli photo/flickr (reprinted under creative common license)
Continental drift along the plates' fault lines has not scarred Iceland's haunting, enchanting landscape of lush green plains, steep cliffs, deep canyons, clear fjords, and powerful cascading waterfalls. Iceland's active volcanoes, exploding every five years, have done no damage to this island that is the size of Kentucky. Rough hewn and jagged, Iceland's landscape is geologically young and its 320,000 citizens (100 % literacy) seem to express this hard vitality, the beauty of a thriving respect for hard work as they carve out a life for their inner Viking on less than one percent of the island's ancient, space-age looking terrain
What happened? Is the island sinking?
After former prime minister David Oddsson gained popular support for and persuaded the national government in 2003 to deregulate the banks. The nation's three banks established branches in Britain, created consumer internet accounts in Europe, loaned money to California projects, accepted deposits from Spain, borrowed money from Germany, and grew larger than the country's Gross Domestic Product (GDP). In October, 2009--in less than nine days, after a spectacular five year expansion--the country's three banks collapsed, sunk the economy, and sent ripples across the world. Iceland's leaders are now banging on Russia's door, in search of a massive cash infusion, a $5.4 billion loan. This country, where a beer once cost $13 and many people normally worked two jobs, is bankrupt.
The main problem is that investors or financiers won't touch Iceland's currency. No firm or international bank will accept payment in kronas, Iceland's currency; the krona, is worth three times less than it was three months ago (180 krona to the dollar, up from 55 krona to the dollar). The national government has taken over the country's three banks, but the government does not have sufficient currency reserves to meet the bank's debt obligations. Iceland, with a GNP of $14 billion, does not have cash reserves in foreign currencies to pay for its imports. Iceland can not pay for its shipments of food. Its only natural resource is thermal heat from underground hot springs. Its major currency source from its global fishing fleet and the sale of whale meat to Japan.
FFisher's shack (above) orvaratli photo/flickr (reprinted under creative common license)
Iceland homes
orvaratli photo/flickr (reprinted under creative common license)
Iceland has placed a new phrase into the lexicon of the financial crisis: national bankruptcy. It cannot meet its external debt obligations to international lenders. Both Britain and the US refused immediate help. (Britain reconsidered and will loan Iceland the capital needed to pay off the accounts held by British citizens, clearing the way for assistance from the International Monetary Fund.)
Why now?
Five years ago, Iceland's banks were unleashed from government regulation by the efforts of a former prime minister and encouraged to become more "entrepreneurial," and expand aggressively into foreign markets. In five years, the three banks went from being primarily domestic lenders to being highly sought lenders to foreign markets. These loans, in turn, were supported by high interest rates on deposits that attracted investors from Europe, especially Britain, and America. Domestic spending and borrowing increased as the banks grew, but domestic loans were often made in foreign currencies, which carried lower rates and helped leverage capital when the krona was strong.
But the banks failed to establish the reserves needed to meet future debt obligations, assuming their borrowing could be rolled over and the krona would continue to be strong. Because the krona was not tied to the euro, its isolated position cut Iceland off from the wider fiscal system that supports the euro and left Iceland vulnerable, even through the country's three banks, in 2006, had combined assets eight times larger than the country's GDP (gross domestic product). Before its implosion, Iceland consistently rated the strongest and most stable economy of the developed world, and even last year, Iceland had an unemployment rate of less than one percent.
Will Iceland Survive?
Consequently, Iceland has announced it will receive a $2.1 billion loan from the International Monetary Fund, with additional loan support from Scandavian countries. The Rescue package borrowing represents the equivalent debt of $33,000 per citizen.
What's the connection to the American South?
Despite the climate contrasts and the distance separating the locations, Iceland's collapse offers some valuable lessons the South-and the rest of America-would be wise not to ignore. A close reading of Southern economic development finds evidence of individuals and institutions who put self-interest ahead of the community's interests.
What's wrong with taking care of yourself? Greed has never resulted in growth. Economic growth can only be sustained when the common good and business development share and benefit from a common vision and enhance mutual goals. In fact, greed always brings the reverse of prosperity; the temporary bubble of good times ends swiftly and creates new conditions which make economic recovery even more difficult.
Many southern land holders blocked industrialization in order to maintain cheap labor, only to see their fortunes decline when the price of crops fell. Across the south are many small towns less prosperous now then they were in the 1950's. Their main streets, once busy, are empty; their storefronts ae boarded up; their central place in community life abandoned. Locally, southern families, black and white, have suffered the consequences of an economic development that benefited small numbers of residents. Many families have been unable to keep up with housing costs as their wages stagnated. The difficulties of families trying to get on their feet after Katrina is a marked witness to the uneven playing field that operates in much of America and the South. One tenth of Florida's residents (1.7 million) are now receiving food stamps. South Carolina lost 400 jobs last week when two plants closed or laid off workers.
Iceland's collapse, while swift and total, is also a remarkable story of a people who pulled together and found the means to recovery, confident that their sense of teamwork and closeknit appreciation of the commonweal, will see them through and restore their country to its place as the world's most development and economically successful country.
If Iceland can weather hard times, so can the American South renew its spirit of shared prosperity, realizing growing the pie benefits everybody's pocketbook .
Reykjavik, Iceland
(reprinted under fair use for educational purposes)
Iceland horse (reprinted under fair use for educational purposes)
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Top-level comments on this article: (2 total)"Walter, sounds like America to me? "Greed has never resulted in growth. Economic growth can only be sustained when the common good and business development share and benefit from a common vision and enhance mutual goals. In fact, greed always brings the reverse of prosperity; the temporary bubble of good times ends swiftly and creates new conditions which make economic recovery even more difficult" Great artcile.
Like you already stated "In fact, greed always brings the reverse of prosperity"
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