and now iceland is bankrupt
From the NY Times:
“Iceland is bankrupt,” said Arsaell Valfells, a professor at the University of Iceland. “The Icelandic krona is history. The only sensible option is for the I.M.F. to come and rescue us.”
I can't imagine how a country can go bankrupt, but apparently, it's possible.
Business Week says that Iceland's banks used wholesale funding to transform themselves into international financial institutions, to the point where two thirds of financing came from abroad. One of the strategies that Icelandic banks used was to offer higher interest rates to attract British investors, while offering low borrowing rates domestically, to encourage local businesses to expand. Basically, the country had a large current account deficit.
The story sounds kind of familiar... didn't this happen in the '90s, when emerging economies in Asia were offering high interest rates to attract foreign investors? And the money that came into the region were poured into rapid economic expansion, which led to current account deficits? Which subsequently led to the devaluation of the baht, and the financial contagion that led to the 1997 Asian financial crisis?
You'd think they would've learned from the experience of others.
Or maybe they were thinking, Oh, that's not going to happen to us, we're not a developing country, we're far more stable than that....
(And apparently I am now old enough that I am actually witnessing history being repeated.)