The Financial Times has a quite amazing story about Iceland, amazing in that the financial wreckage created by the collapse of their banking system will have repercussions that will last for years.
How bad is it? This bad.

“The huge measures introduced by the US authorities to rescue their banking system represent just under 5 per cent of the US GDP. The total economic debt of the Icelandic banks, however, is many times the GDP of Iceland” — Iceland Prime Minister

The UK invoked an anti-terrorist act to freeze the £8bn in assets of Icelandic banks there. This prompted Icelanders to start websites telling Gordon Brown that they are not terrorists. (see image.)

Their currency is not accepted anywhere except Iceland now. They appear to have a strong and cohesive culture, but it’s difficult to see how their society will not fracture, something which will be made worse by an exodus of escaping citizens.

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Stores in Iceland are emptying out and the country only has two weeks of imported food left. How does a small island country buy and have goods shipped to it when no one will accept their currency? Their stock market reopened today, then dropped 77%. Norway just priced shares in the now nationalized banks of Iceland at zero. Yes, zero.

The Baltics could be next.

Two major banks in Scotland just failed and were taken over by the British government. Would an independent Scotland have had the financial resources to handle that on their own and is the dream of Scottish independence now dead?

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Especially when their banks were crazy over-extended in other countries? The government of Iceland has now nationalized all their major banks, their currency is dropping off a cliff, and their stock market has been closed until Monday.

Apparently their banks took a cue from US banks, and went insane on leveraged greed too - but even more excessively. Not a good idea for a tiny country.

How insane did it get there?

In the past five years, people’s average wealth has grown by 45 per cent - and the money has gone into houses and cars, financed by 100 per cent loans based on a spread of foreign currencies. Now the krona is plummeting, loans are ballooning and thousands are defaulting.

Basing the interest rates of car loans on a spread of foreign currencies is howling at the moon madness. Good for coyotes maybe, but not for financial institutions.

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(Icelandic salted cod. From Flickr.)

The US financial crisis is causing an implosion in Iceland, which is forcing a cascade into the European financial system.

Serious talk of a bank holiday and food hoarding has been heard.

Head of largest oil company says oil imports may cease because of lack of US dollars.

Glitnir, a large bank in Iceland, was way overextended on now-toxic real estate. They were already in trouble when Lehman, their primary line of credit, went under. They had no back up financing and soon could not pay bills. The government was forced to take over the bank, but now no one wants to deal with any Iceland bank. And they don’t want their currency, the krona, either. It has dropped 14% since Sept. 29 against the euro.

Hey, maybe we can go back to barter - frozen or salted cod for wheat and red wine. Worked in the 1930s.

The decision by Paulson and Bernanke to let Lehman die has, in retrospect, turned out to be a serious mistake. The unintended consequences have been huge. Iceland is but one example. Financial institutions have money in the billions they can not access because of the bankruptcy proceedings plus there are enormous amounts of shadow banking system transactions (CDOs, CDSs) that Lehman was a party to that are also frozen and may never be transacted.

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Iceland heats 90% of their homes with geothermal energy. 80% of their power comes from hydro with the remainder from geothermal. It’s so cheap that they heat sidewalks in winter with it. While geothermal isn’t completely renewable, it is certainly mostly so, which makes Iceland probably unique in that virtually all its power and heating is from renewable, clean resources. And it’s cheap!

More. National Energy Authority of Iceland. Wikipedia.

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