When countries go bankrupt

[19 November 2008]

By Rob Horning

Paul Kedrosky linked to this FT article describing life in Iceland after their banking system completely collapsed. The whole thing makes for some unsettling reading, unless you hate Sigur Ros or something and can extract some schadenfreude from the whole situation.

The Icelandic krona’s freeze in the capital markets had now spilled over into the day-to-day transactions of Icelanders abroad. Holidaymakers and business travellers venturing “til Útlanda”, as it is called, found their credit cards refused, and those wishing to buy foreign currency could not find willing sellers, aside from one or two who limited their purchases to €200.
Trust in the banks had evaporated and people were trying to find a safe haven for their cash. One man had waited for six hours in a bank while his life savings, more than £1m in kronur (at IKr200 to the pound), were counted out in cash in front of him. “I feel like an innocent man dragged from his bed, put in a barrel and hurled over Gullfoss!” wrote one journalist that morning.

This is why people used to stuff money into mattresses.

Naturally, Iceland (just like the U.S.) had an irresponsible housing boom alongside its overleveraged banking system.

Easy access to 100 per cent mortgages has seen a change to the traditional pattern of young Icelanders living with their parents until their mid-twenties. The suburbs of Reykjavik have grown by a third in the past decade, most of it housing for first-time buyers. Whole new neighbourhoods have emerged. New streets house young couples, many with children, most with two cars in the drive and furnished with the best that Ikea can provide. All bought with 100 per cent loans, many in foreign currencies.

Also mentioned are the “viking raiders”—brash Icelandic bankers like Jon Ásgeir who have now destroyed their nation.

One of the most telling images was the departure of Jon Ásgeir’s private jet on news that the government had nationalised Glitnir Bank (in which his investment vehicle Stodir was a leading shareholder), wiping out his shareholding and rattling the debt-burdened house of cards that is his Baugur business empire. Painted black and as sleek as a Stealth bomber, the aircraft was photographed taxiing from its hangar by Morgunbladid, a daily newspaper. Like the last helicopter out of Saigon, the departure of Ásgeir’s jet symbolised the end of an era, the last act of Iceland’s debt-fuelled spending spree.

An article from Spiegel also explores what happens when nations go bankrupt. It highlights Argentina’s experience, when people scurried to Uruguay with suitcases full of dollar bills and others slept in front of ATMs waiting for a chance to withdrawal money, if any was left. And it looks at Hungary, the first European nation to be bailed out by the IMF.

Much of the blame for Hungary’s current debacle lies with the failings of the past. The once-successful nation of 10 million people lived beyond its means for years. With government finances spinning out of control, the national debt ballooned to two-thirds of the country’s GDP. “The funding for our excessively high standard of living came from other countries,” admits András Simor, the governor of the central bank, not without a dose of self-criticism.
The Hungarians have always been considered shopaholics. Hundreds of thousands bought themselves big cars and went on shopping sprees in the chic boutiques on Váci Utca in Budapest—all on credit. The real estate market boomed, turning close to 90 percent of Hungarian apartments are privately owned.

This all sounds very familiar. How long will it be before we have to say, “We are all Hungarians now”?

Published at: http://www.popmatters.com/pm/post/when-countries-go-bankrupt/