'Send us your cash!'

Iceland has been in the news recently, shutting down UK airspace by spewing volcanic ash into the stratosphere.  Yesterday I saw an account of a British Airways Boeing 747 that had flown through a similar cloud near Jakarta in 1982.  All four engines stalled, and the plane glided from 36,000 feet to 13,500 feet before the pilot could restart them.  In addition, the ash scoured the windshield, making it completely opaque, and they had to land on instruments only.  Very scary stuff.

Iceland was also in the news last year.  You probably heard about the collapse of Merrill Lynch, Lehman Brothers, Washington Mutual, and Wachovia bank.  You probably didn't hear about the collapse of Glitnir, Landsbanki and Kaupthing, even though they had a combined value of approx. US $120 billion. That's because they were in Iceland.

Until recently, Iceland was one of the poorest countries in Europe, only notable for not being icy.  (The name is a derivation of 'island' but the Gulf Stream actually keeps it quite temperate -- unlike Greenland, which is covered in ice.)  In 1994, Iceland joined the 'European Economic Area' (kind of a subsidiary to the European Union) which allowed them to diversify from fishing exports into financial services.  With a low tax rate, they attracted a lot of investment, including US $6 billion from the UK and Netherlands.  It was a real rags-to-riches story, and by 2007 Iceland was ranked as the most developed country in the world!

However, betting everything on financial services meant they were more exposed to the financial crisis than any other nation.  In October 2008, all three major banks went into receivership, the currency collapsed, and the country went into a serious economic recession.  But that's not why they were in the news.

They were in the news because, although the European Economic Area agreements required Iceland to guarantee those deposits (just like the FDIC guarantees US deposits, even for foreign investors), the UK did not trust Iceland to meet its agreements, and instead it invoked anti-terrorism legislation to seize Iceland's assets in the UK! While that may have sounded like a good idea at the time -- declaring a country a terrorist threat just for political expediency -- it turned out to be a very, very bad idea.

That's because the UK only seized a small amount of money, paid out US $6 billion to investors, and then handed Iceland a bill for the difference.  While the Icelandic government passed a bill which would have repaid them over 6 years, the Icelandic people were so upset that they held a referendum -- the first since becoming a nation in 1944! -- and defeated the bill by 93%!  (Wikipedia has a good article on the Icesave dispute if you want to read more.)

So the joke of the day is the UK telling Iceland, "we said 'send us your cash!'"