Fallout: The Financial Crisis

Could Britain become another Iceland?

Stephen Beard Jan 30, 2009
Fallout: The Financial Crisis

Could Britain become another Iceland?

Stephen Beard Jan 30, 2009


Kai Ryssdal: Energy workers are on strike across the United Kingdom today. Thousands of them are protesting the use of foreign labor even as the unemployment rate in Britain is rising. There have been similar demonstrations in half a dozen European countries. Governments are being blamed for not being able to pull their economies out of recession. In the UK a second multi-billion dollar bank bailout has definitely not been well received, with some economists adding insult to injury by saying it could turn England into another Iceland. From the European Desk in London, Stephen Beard reports.

Stephen Beard: The U.K. Treasury has poured hundreds of billions of pounds into shoring up the banks. But the recession is deepening. And usually resilient Londoners are losing hope.

Londoner: I feel that at the moment we could actually go bust. And I don’t think that anybody in charge actually really knows where to go from here. I think they’re all guessing.

Beard: You really think the whole country could go bust?

Londoner: I really do think so, yeah.

Beard: Can I ask you, do you think Britain is the new Iceland? London is Reykavic on Thames?

Londoner 2: Yes!

Beard: So you think it’s that bad?

Londoner 2: I think so. In terms of what the Treasury has, there’s only limited funds as far as I can see. And what happens when the pot is empty?

Currency dealers are worried about that too. Last week they drove the pound down to $1.25, a 23-year low against the greenback. Dealers fear the British government is making promises it can’t keep, guaranteeing the British banks when the banks’ liabilities are four times bigger than the U.K.’s gross domestic product. Economist Will Hutton:

Will Hutton: The amount of red ink! If you put the U.K. budget deficit next year together with the amount of new liabilities that the taxpayer is having to underwrite, we look like Iceland on Thames.

When Iceland’s banks went bust, their liabilities were almost ten times the size of the country’s economy. Iceland had to beg the International Monetary Fund to bail it out. Hutton says Britain may have to do the same. Being lumped in with Iceland was bad enough. But then American investment guru Jim Rogers urged everyone to dump the pound. He told British TV viewers, your currency is a busted flush.

Jim Rogers: North Sea oil is drying up. And the financial system, which has always been a huge contributor to the U.K.’s balance of trade, is also now finished. The major sources of income for the U.K. are now disappearing. And that’s going to lead to serious problems with your currency. It always has.

Many analysts dismissed Roger’s remarks as ridiculous. And they said it was absurd to compare Iceland with the world’s sixth largest economy. But this week a ship sailed through the winter fog into the English port of Grimsby on a mercy mission, with a cargo of aid for beleaguered and shivering Brits.

Heimir Karllsson: Wooly jumpers, socks, and caps and mittens and scarves and blankets.

Heimir Karllsson is a radio host in Iceland. His listeners were so touched by the plight of poor British pensioners they sent the U.K. a container full of warm winter clothing.
Iceland may have been battered by the economic crisis, but Heimir reckons it’s better equipped than Britain to weather the storm.

Karllsson: We are in many ways self sufficient. We have the geothermal energy to warm our houses so no one needs to be cold. And we can be self sufficient when it comes to food.

Comparisons with Iceland are acutely uncomfortable for the British government. For more reasons than one. This week Iceland’s ruling coalition collapsed — the first government casualty of the financial crisis.

In London this is Stephen Beard for Marketplace.

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