The credit crunch. Soaring oil prices. Soaring utility bills. Soaring food bills.
One of the worst affected countries is the UK, but probably the most affected country is Iceland.
Now Iceland is regularly hailed by the SNP as part of the Arc of Prosperity, one of an arc of Scotland’s neighbouring countries that always seems to be doing rather better than us, outstriping the UK economy by miles.
One of the SNP’s goals is for Scotland is to join that Arc of Prosperity and better its economic growth rate. Obviously they claim independence would be the best route to achieve this; it gives Scotland full fiscal control over its own economy.
(Other countries in the Arc of Prosperity:-
Norway. Population 4.7 million
Denmark. 5.4 million
Finland. 5.3 million
Ireland 4.3 million
Sweden 9.1 million
All apart from Sweden have populations in size similar to Scotland; and all have had sigificantly higher economic growth than Scotland and the UK for many years now.)
So whats happened in Iceland? With the country performing so well economically and with a population of only 300 000 people, the banks wanted and got foreign investment. The Icelandic Government even loosened its fiscal policy before the 2007 election. Foreign capital poured into Iceland.
Now when the U.S. subprime mortgage market collapsed and started the credit crunch, foreign investors panicked and the money dried up. Some wanted their money back. All this has devalued the Icelandic kröna and forced the Icelandic bank to set interest rates at 15%. The country is now suffering the worst effects of the credit crunch I mentioned at the start.
Compare this with the U.S. They too are suffering the credit crunch, but are still receiving massive foreign investment. Why? Because they have a vast consumer-led population (around 304 000 000, around 1000 times bigger than Iceland’s). Hence the dollar has weakened recently; but relative to the Icelandic körna isn’t so bad and interest rates arent so bad.
One rate to look at is the current CDS rates of banks. These are Credit Default Swaps, basically a measure of how much insurance the bank needs for its debt. The higher the number the worse off the bank.
For example, when the Northern Rock was nationalised its CDS was at 295. [18 Feb 2008]
CDS have been increasing throughout the banking sector however. The US Bank Bear Sterns was bailed out by the US Government with a CDS of 720. [Mar 2008]
Other March 2008 CDS of banks were:-
Lloyds TSB 133
Bank of Scotland 235
Alliance and Lecicester 342
but the British banks were nothing like the Icelandic banks:-
Iceland, with a small population; for years one of the best economies in the world. It made a mistake relying on too much foreign capital. And when that foreign capital ran into problems, so did it. Its tough for the Icelanders, having being used to the good life for years, and now feeling the worst effects of the credit crunch. The credit crunch may be global but Iceland are feeling short term consequences of their own mistakes. Yet had the U.S. subprime mortgage market held up it may have never mattered.
Thats why the Icelandic government is now thinking of joining the Euro. The Euro is strong and the Eurozone – those countries that use the Euro as their currency – is now the biggest economy in the world, after the dollar weakened in March 2008. The Eurozone has a population of 320 000 000 people and is expected to grow as other European Union countries meet the criteria for membership.
So then what of the Arc of Prosperity? Is it in financial ruins?
Iceland may be in trouble now but remember they started from an economic base much higher than the UK or Scotland. Their problems are all relative, and will probably only result in a decline in economic growth for a couple of years, before resuming their position back near the top of the world’s economies. Even if these problems do continue then they always have the Euro to fall back on if needed, although their fishermen probably won’t like joining the EU.
What’s more another Arc of Prosperity country – Norway – has just given them 1.5 billion euros to shore up the Icelandic economy. And if Norway can afford to bail out other countries in the midst of a global credit crunch then the Arc of Prosperity can’t be doing that badly.
The Arc is better placed than most to ride out the credit crunch. I’m sure Gordon Brown and Alistair Darling will try their best for the UK.