The crisis goes sovereign

With European countries in a rush to take banking sector liabilities onto the public balance sheet, they might want to take a look at where that route goes, in extremis: Iceland, as a banking crisis becomes a full blown macroeconomic crisis.  Today has seen a bewildering series of events, even against the backdrop of a problem that had been viewed as unsustainable for a long time (gross external debt 550% of GDP).  We have: Russia apparently emerging as the lender of last resort (which must indicate other requests that were turned down), and the adoption of a what looks like a crazily overvalued peg for the króna (130/euro official when it’s trading at 200/euro).  The underlying cause is the huge size of the banking sector and its reliance on overseas liabilities relative to the size of economy — a situation that will have uncomfortable echoes in non-Eurozone eastern Europe.   Indeed, it’s only that Iceland is so small that the situation has not already caused more panic than it has.   But it’s a disturbing parable for the overall banking crisis.

This entry was posted on Tuesday, October 7th, 2008 at 4:03 pm and is filed under Economics and demography. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

1. Islândia, o primeiro teste « Notícias do mercado Says:
   October 7th, 2008 at 7:35 pm

   [...] A crise não assusta muito porque a Islândia é muito pequena (300 mil habitantes). Mas é um péssimo indicador para as economias européias. [...]

2. jag Says:
   October 7th, 2008 at 11:17 pm

   Interesting geopolitical sidenote to the Iceland story:

   http://www.spectator.co.uk/coffeehouse/2203316/coffee-house-exclusive-what-the-russians-want-in-return-for-bailing-out-iceland.thtml

3. Frosty relations in the north Atlantic | afoe | A Fistful of Euros | European Opinion Says:
   October 10th, 2008 at 12:57 am

   [...] About The Fistful European Opinion PreviousNext European Impressions « The crisis goes sovereign [...]