Tuesday, October 14, 2008

Will Russia save Iceland?

There are only 313,000 people living on Iceland - Pilsen times two - but there have been many Icelandic people whom I ran into, including Gunnar Pálsson, a physicist and our housing manager at Rutgers, a boyfriend of a friend of mine, and others (Larus Thorlacius will represent Icelandic string theorists here).

Because the Icelandic financial troubles began to influence our lives, I looked what's going on. It's rather unusual.

The most developed country of 2007, according to the United Nations' human-development index, with USD 66,000 GDP per capita, is on the brink of national bankruptcy.

The national banks' debt was rather high so the government nationalized all of them. Payments were frozen and Britain got very upset about its savings.

I am amazed how eager everyone in the world is to let the most developed country of the world to sink next to Zimbabwe. Their currency became worthless, dropping to 20% of the value a year ago. The stock market re-opened today and dropped by 77%.

Where are all the people who are so eager to help? The only serious offer of help came from Russia. Before the war, comrade Stalin offered his hand to Czechoslovakia against comrade Hitler - when the Western allies didn't move their finger - so I don't find it that shocking.

Needless to say, Russia's motivations are probably not entirely idealistic. As Time magazine argues, the Icelandic herring popular in Russia is not the key reason.

What's probably more important is the access to the Arctic and its minerals and fossil fuels that may soon become relevant. A friendly Iceland would probably improve Russia's position a little bit. And Russia cares about this piece of the planet. Iceland is exactly on the boundary between the North American and Eurasian tectonic plates, a concept used to define the rights to access the Arctic.

As the 313,000 Icelanders are threatened by hunger, their president thinks that the most important thing is to fight climate change. Obviously, certain bureaucratic assholes in convenient enough offices are only threatened by 0.6 °C of warming per century. With these "sensible" priorities, his meat should quickly be sold as pork to repay a part of his country's debt.

At any rate, I think it would be crazy for Iceland to become a third-world country. Too bad that others haven't helped Iceland under more acceptable conditions but I would still vote for bailout. If other nations allow Iceland to collapse because of a crisis created elsewhere, others could follow the suit: New Zealand, 12 others, or Switzerland, Norway, ...

Well, more precisely, the second country to follow Iceland is probably Hungary. They have a notorious public debt, too. The responsible nations of savers are going to pay for the irresponsible behavior of others but I still think it is a better option than new third-world chaotic countries randomly distributed across Europe.

As a percentage of the GDP, the Czech budget deficit is only 1/2 of the Hungarian one which is why the Czech government can afford some tough comments about the need to follow the EU fiscal rules. But in this particular situation, I am not certain whether it is the government spending or the European budget regulations that are the more counterproductive rules to reduce freedom and prosperity.


Iceland has officially asked the International Monetary Fund for help.

1 comment:

  1. Lithuania is for the saving Iceland, Icelands an a Planet too....