Monday, June 13, 2011

A tale of two debtors

Two island nations who experienced enormous economic bubbles on the back of cheap credit prior to the financial crisis that began in 2008 are separated by only a single letter in their names. Yet Iceland and Ireland, while each suffering crushing economic woes in the aftermath, have nonetheless followed diametrically opposed paths in their responses to the crisis. Ireland followed the textbook: a bailout involving huge figures being pumped into the banking industry to keep it going and to ensure international creditors did not miss out, effectively nationalising the bankers' mistakes. These debts then led to austerity cuts. In Iceland, the crisis brought down the government and the new administration did not guarantee the banks' debts. A referendum refused public backing to the bad decisions made by their bankers, allowing them to fail and for this to have its effect on Iceland's overheated economy. They have even now prosecuted the prime minister at the time for criminal negligance in failing to provide adequate regulation of the banking industry.

When debts are defaulted upon, it is not only the debtor who may be shown to have erred. Creditors take a risk and there is such a thing as a credulous creditor. Although it remains difficult to predict what the ultimate outcome will be for both nations, I admire Iceland's willingness to allow the banks to pay for their own mistakes and their desire to hold those involved in causing the problems to account. Despite the staggering sums involved in the credit crisis and the gross negligence of various political and financial figures, Iceland have been the first to bring criminal charges against those responsible.

4 comments:

phillip said...

Superb! You have to laugh at Ireland though; centuries resisting assimilation by the English and in just a few generations of Europe's sweet caress it'll be unrecognisable.

I'm your governor Pete Wilson, ya know
The baddest governor to ever grab the mic and go
BOOOM !
Gimme a budget and watch me hack it !
Gimme a beat and I'll show you how to jack it !
I give the rich a giant tax loophole
I leave the poor living in a poophole

byron smith said...

NYT: Paul Krugman on The Lesser Depression. If either Europe or the US (or both?) generate a further crisis, will we have to rename the Great Depression? Just as the Great War later became known as WWI...

byron smith said...

Guardian: On standing up to the ratings bullies.

byron smith said...

Birgitta Jónsdóttir: Lesson from Iceland: The people can have the power.