Iceland Insolvency - When your bailout backfires

lrm21 · Oct 5, 2008

I know its only Iceland but just like trying to bailout one bank was more than they could handle, we are now trying to bailout the entire system.

http://www.portfolio.com/views/blog...hen-too-big-to-fail-becomes-too-big-to-rescue

This is not how triple-A sovereigns behave. It's as though the analysts at Moody's were only able to see one step ahead, and not two: they could anticipate that Iceland would bail out its banks, but they couldn't anticipate that when a tiny country bails out a bank whose assets vastly exceed the country's own GDP, then the sovereign itself loses much creditworthiness. One scary datapoint: the assets of Kaupthing Bank amount to 623% of Iceland's GDP, which is possibly why its own credit default swaps are trading somewhere over 2500bp.

How bad can things get in Iceland? Here's what one local emailed Tom Braithwaite:

They are fighting powers that they are powerless to fight. It's like tackling a storm raging in the sea with a teaspoon.
The main supermarket can't get imported goods because they have no currency. The shops are half empty. One of the store managers has advised people to start hoarding. We're running out of oil. And winter came last night - about a month early.

Received opinion has it that if Iceland backstops the Icelandic banks, then the other Nordic countries, or someone, will backstop Iceland. Which might be true: we'll find out "very soon". But there's no news yet
More...

stevegee58 · Oct 5, 2008

They'll just keep doing what they do now: drink hard liquor to excess and keep the damn ferners out.

wilburbear · Oct 5, 2008

That's what could happen when you introduce cancer from a small balance sheet to a big one.

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Iceland Insolvency - When your bailout backfires

lrm21

stevegee58

wilburbear