Iceland is a small country in big trouble.
During the heady times of economic growth, its banks expanded operations far beyond what the country could possibly support. When the global financial crisis came, all three collapsed. Millions of depositors in Britain and the Netherlands would have lost their savings.
When banks collapse nowadays, fortunately, governments intervene. The governments of both Britain and the Netherlands guaranteed the accounts of their citizens. In total, this cost said countries approximately 3.9 euros (or 5.3 billion dollars).
Understandably, said countries were also angered at picking up the tab of Iceland’s failed banks. The root of Iceland’s current troubles lies in their demands that Iceland repay the €3.9 billion. To force Iceland’s hand, Britain – in a rather mean gesture – used anti-terrorism laws to freeze Iceland’s financial assets. This helped crush the country’s economy.
Now, there are two problems with the demands of Britain and the Netherlands. Firstly, Icelanders really do not want to repay the money. To the average citizen, suffering for the mistakes of a few bankers smacks of unfairness. Giving money to what many view as a big bullying country is also unpopular. In a recent referendum on the question, 93% of voters rejected a deal to repay Britain and the Netherlands.
Secondly, it’s practically impossible for Iceland to repay the money. The country’s population, after all, numbers only around 300,000. The €3.9 billion in debt amounts to almost half of its GDP. Imagine if the United States owed $6.5 trillion to another country because of Goldman Sachs.
The best step for Britain and the Netherlands would just be to forgive Iceland’s debt – or, if that fails, to negotiate a very generous deal. Third World countries have their debt relieved all the time; there’s no good reason for Iceland to be an exception.
Perhaps United States can lend a hand. €3.9 billion is a lot for Iceland, but practically nothing for a country of America’s size. It may not even need to actually spend money to help Iceland; Britain, after all, still owes the United States £40 billion pounds (inflation-adjusted) that it borrowed from it to fight WWI.
More fundamentally, this situation may end very badly for the West. Iceland’s predicament brings to mind the massive reparations Germany faced after WWI – something which ended disastrously for all countries involved. Already hostility to Britain and the Netherlands is quite high in Iceland; it will probably rise further. Last November the president of Iceland accused its neighbors of betraying Iceland during its time of need.
There may come a time when the West is likewise in a dire strait – whether it be war, economic peril, or something else. It may need all the help it can get. Then Britain and the Netherlands may rue taking a country like Iceland for granted. In the best case scenario, Britain and the Netherlands get their €3.9 billion, and Iceland forgives and forgets. In the worst case – one of those “unknown unknowns” – their bullying may end up costing the West far more than €3.9 billion.