Quick recap: Greedy “too big to fail” Icelandic banks (Landsbanki, Icebank, Kaupthing) leveraged up on risky investments and then went bust. Faced with financial collapse of the country’s banking system, the Icelandic parliament stepped in and guaranteed foreigners repayment of the risky debt taken on by the banks. The reason that such a ridiculous thing was credible at all was that Iceland is a debt based economy like the USA. Nobody bought anything with cash. Stores didn’t buy food to resell using cash, they used/use credit. No banks=no credit=no food on the shelves even for those who have money in hand. Such are the wages of the Wimpy Economy.
Of course, governments have no money of their own, they spend other people’s money. Icelandic people figured out that government was going to make debt slaves of the entire population of 300,000 people in order to make their banker masters happy. Someone else had the fun, and the common man was going to be in debt for a lifetime as a result. The people called B.S. on this crap as they should. As a result, the president of Iceland used his veto power on the parliamentary mandate and demanded a popular vote on the matter. Apparently he was more afraid of the wrath of the people than of the wrath of the bankers.
As a result of the popular pushback, creditors have been offering better and better terms. But the people didn’t rack this debt up so they don’t appear to be in any mood to pay anything no matter how good the terms are. So now the vote is imminent and Icelanders are bracing for the blowback they know will happen when they vote to default on the debt.
My take on this is that the threat of not being able to get credit going forward is far worse than the reality will be. Why? Because as much as the creditors posture and pose, they are screwed unless they can convince people to go into debt – that’s how they make their living. If all credit were cut off to Iceland the people would adapt and they would show the world that you really don’t need credit to live. Worst case they would start paying for things with gold and silver coins. The fiat currency crowd does not want this and even more to the point, cannot have working examples in the world of economies that are free from the burden of credit and fiat money. After all, if Iceland shows that it can work then who next? I predict that Icelandic people will vote against paying the debt back and before 2010 is finished their credit lines will be reinstated despite all the posturing and threats if they don’t agree to become lifelong debt slaves.
