Iceland, the small volcanic island nation about the size of Kentucky, teeters on the edge of bankruptcy. October 2nd the government took control of the last major bank in Iceland. Arsaell Valfells, the business and economics professor at the University of Iceland, said ‘”Iceland is bankrupt. The Icelandic krona is history. The IMF has to come and rescue us.”

Iceland has been booming since the government deregulated the banks in the 1990’s, and opened a domestic stock market. To quote The Associated Press, “Entrepreneurs become its greatest export...” Icelandic companies began heavily investing in foreign companies, owning stakes in dozens of chains across Europe. The main country invested in was the United Kingdom, with Iceland owning major stakes in teams and retailers alike. The average family’s income jumped forty-five percent in five years, with the GDP rising by five percent a year.

This enormous bubble had to pop, unfortunately. The banks in the tiny country were overextended. It owes more than it can possibly pay back, a figure the Associated Press says is in excess of $100 billion. The country’s GDP, by comparison, is $14 Billion. The government wrote emergency legislation to nationalize the failing banks after the krona lost a quarter of its value in a single day.

In a commentary in Forbes, Arsaell Valfells alleges that Gordon Brown, the prime minister of the UK, killed the Icelandic economy with his knee-jerk response. The problems occurred when the large bank Landsbanki was nationalized. A smaller operation, Icesave, which is owned by Landsbanki, froze access to its accounts. Icesave has over 300,000 depositors in Britain. Gordon Brown issued a statement saying he would sue the Icelandic government on behalf of the depositors losses. He also used anti terror legislations to freeze the assets of Icelandic companies. The foreign exchange has been shut down, and almost no one on the foreign market will accept the krona, which is worth half of what is was worth a week ago.

The options Iceland is left with are few. According to the International Herald Tribune, if Iceland accepts aid from the IMF, the International Monetary Fund, it “would necessarily involve accepting a series of harsh measures to restore fiscal and monetary stability, would underline the extraordinary reversal in the country’s fortunes after a decade-long, debt-fueled binge by the country’s banks, businesses and some private citizens.”

It could also join the EU, although this seems politically impossible. In addition to the powerful fishing industry wanting to stay far from the EU, Iceland’s Prime Minister is openly bitter about Europe, after they refused to respond to requests for loans or assistance. He was quoted as saying: “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.” He has been in negotiations for a loan from Russia.

We will see if Iceland can recover from its financial ruin, and the aftershock it will have on European markets.

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