Iceland In Midst Of The Banking Meltdown
One would have never imagined that the recent subprime crisis would affect places other than America, let alone a seemingly distant Iceland. So then why are experts suggesting that Iceland could well become the first “national casualty” of the current credit crunch? Iceland’s banks got their money primarily from international investors, making the Icelandic miracle heavily dependent on foreign capital. James Surowiecki from the New Yorker explains further. Iceland has been swamped by that tsunami because it trusted in the availability of global credit in time for that credit to evaporate. And the fact that Iceland has been so dependent on foreign investors makes those investors even more skittish about investing there: in markets, weakness often begets weakness. Further, the country’s troubles have made it a potential target for speculators seeking to drive down the value of its currency and perhaps cause a run on the banks. In 1998, hedge funds purportedly worked together to attack Hong Kong’s currency and its stock market, an attack that was foiled only when the government bought up a sizable chunk of the stock market. It’s not clear that a similar cabal is gunning for Iceland—the governor of its central bank insists that one is—but the notion is certainly plausible: with a population the size of Pittsburgh and a central bank whose total reserves are less than five billion dollars, the country makes an easy target for hedge funds flush with cash.