When America Sneezes, the Rest of the World Catches a Cold Posted by Hanna Lundqvist

Every day, we get more bad news about the global reach of the financial crisis. Today, Icelandic Prime Minister Geir Haarde announced that Iceland, which the UN rated the most developed nation in the world, is hovering on the brink of “national bankruptcy.”

Iceland’s famous banking industry, which exploded in the 1990s and generated one of the highest per capita incomes in the world for the tiny country, is failing. The financial system was largely built by short-term borrowing from abroad. Although Icelandic banks did not directly own the toxic debts that felled other banks worldwide, the global spread of the credit crisis from the United States has hit Iceland hard, particularly making it virtually impossible for the Icelandic banks to handle their foreign loans. In the past few days, the government effectively nationalized two of the three largest banks, with Sweden stepping in with an approximately $700 million loan for the third. The Icelandic kronor lost half of its value before the central bank stepped in yesterday to fix the rates.

Bank collapses and bailouts may no longer be all that shocking for Americans, following weeks of similar news here at home, but Iceland’s troubles have particularly enormous ramifications worldwide. Icelandic banks and companies have invested heavily across Europe and particularly in Britain, which announced a bailout of its own this morning. Thousands of British citizens have banking accounts with Landsbanki, nationalized by Iceland yesterday, which has stopped allowing customers to make withdrawals. Should Iceland’s financial system collapse, Europe and Britain would suffer greatly and the global financial crisis would intensify to new levels.

In its turmoil, Iceland is turning to Russia for help, negotiating a €4 billion loan to shore up its currency. The move has “raised tensions between Iceland and its traditional western allies."  Prime Minister Haarde commented that “We have not received the kind of support that we were requesting from our friends… So in a situation like that one has to look for new friends.”

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