We have got used to seeing major financial institutions rescued but now it appears that a country is next - Iceland. The country joined the financial lending frenzy of the last decade and its three investment banks (i.e. not based on retail depositors) have been hugely successful, at least until the "global financial contagion" struck.
Read about Iceland's predicament:
Robert Peston's BBC blog: Markets call time on Iceland
Financial Times.com: Iceland seeks loan to shore up its currency
The three banks have amassed balance sheets that far outweigh the whole country's GDP. A country with a population of 320,000 - the size of Windsor, Ontario - Iceland cannot afford to take over or guarantee the banks and as a result the country itself is in trouble. Maybe it should have stuck to its fishing.
I don't think Warren Buffett would be interested, and European countries are busy dealing with their own bailout problems, so maybe Canada should put in a bid for Iceland? Sure, Iceland is not as warm as the last takeover target, the Turks and Caicos, but it's a start.
... too late the Russians got there first - cost $5.4 billion.
Joking aside, things for the people of Iceland are becoming difficult: hoarding of food,supermarkets unable to import produce, extremely high inflation from the krona's decline, cutting back on leisure spending, inability to travel due to cost. Here's an analysis on the BBC website of the mistakes that led to Iceland's predicament.
And now some of the follow-on effects are manifesting themselves. 1) A whole lot of local government authorities in the UK have large amounts on deposit with Icelandic banks like Landsbanki, now in government hands with deposits frozen, including a bunch in Scotland. What were they doing depositing their money there? Probably chasing higher interest rates. How would such action best be described - foolish, greedy and too risky, getting the best value for government cash, unlucky? Hindsight is always 20/20. No wonder people now ask, where anywhere is a safe store of value? 2) Canadian seafood companies with loans at the suspended animation Icelandic banks may not be able to get replacement loans elsewhere, especially since people in the US have reduced their eating out so sales are dropping. And a planned buy-back of an income fund has had to be put on hold, causing the unit price to plummet. There are too many threads, linkages and surprise consequences for anyone to figure out how it will all sort itself out.
Oct.27 - Iceland asks for $4 billion more in aid, on top of the $2 billion it has already requested, or about $20,000 for every inhabitant. It took 30 years to pay off Montreal's $1.5 billion Olympic Stadium debt, which imposed a burden of only $500 or so per inhabitant. In 2002, the country had only $3.1 billion in total public debt (see Wikipedia's Iceland article). How long will Icelanders be saddled with the burden and how far will its fall in the rankings of GDP per capita?