It is tempting to dismiss Iceland's misadventures as tragicomedy, an economic version of The Mouse that Roared, a country of some 320,000 people (roughly the same as Cork and its immediate surroundings) borrowing €94 billion.
Two chilling realities quickly freeze the mirth. The first is that the investments of the Icelandic banks were largely sound. Like Northern Rock in the UK, their lending was far from unreasonable. Their Achilles heel was that their loans were funded, not by deposits, but by borrowing on the world market. Once banks refused to lend to other banks, they were dead.
The European Central Bank provided Iceland with some operating credit, while the central banks of the other Nordic countries assemble a €10 billion package and Reykjavik negotiates a €5 billion loan from Russia. This, and further assistance, should be adequate to keep the Icelandic economy operational while its government sorts through the rubble. In time the authorities in Reykjavik will most likely recuperate much of their former banks' assets. An Icelandic request to join the European Union has become a political probability.
If the rest of the world can, with a little effort accompanied by a shredding of the rule book, bail out Iceland, it is doubtful whether it could so easily digest a 20 times larger rescue of Swiss banking. The Icelandic ratio of bank assets to GDP was 11:1. The Swiss equivalent is around 5.5:1. The two largest Swiss banks, UBS and Credit Suisse, have assets of just over €2 trillion, while Switzerland's GDP stands at €332 billion and rumours about UBS refuse to go away. Sacrosanct rules and long-established reference points are being swept away by seemingly irresistible torrents of change. The process has become so rapid that even radical analyses become redundant almost as soon as they are put forward.
US author David Rothkopf, a former member of the Clinton administration, last March published his controversial book Superclass - The Global Power Elite and the World They Are Making. The book argues that the world's six billion people are governed by an elite superclass of 6,000 individuals. This superclass, he argued, has helped create complex financial instruments that replaced currency as the primary repositories of "value". These are not issued by governments, most are not regulated, and the risks associated with them are hidden. Research among big US institutional investors reveals that over 80 per cent of staff felt their boards did not understand the risks inherent in the portfolios they were responsible for.
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