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Iceland Goes Bankrupt - Is the U.S. Next?

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Iceland Financial Crisis Causes Government to Collapse:

Iceland's nearly bankrupt economy caused the government to collapse in January 2009. The collapse occurred because Prime Minister Geir HaardeHaarde resigned due to cancer, and the minority party insisted that one of its members fill the position. Haarde insisted that his party's member, Foreign Minister Ingibjorg Gialadottir, take the post. Commerce Secretary Bjorgvin Sigurdsson resigned due to bankruptcy-related stress.

Protesters took to the streets in response to soaring unemployment and rising prices caused by the bankruptcy. (Source: AP, Iceland's government topples amid financial mess, January 26, 2009)

What Caused Iceland's Bankruptcy?:

In early October, Iceland nationalized its three largest banks - Kaupthing Bank, Landsbanki and Glitner Bank - which were defaulting on $62 billion of foreign debt. As a result of the banks' collapse, foreign investors fled Iceland, prompting the value of its currency, the krona, to drop 50% in one week.

Iceland's banks used $100 billion in debt to finance foreign acquisitions, dwarfing Iceland's GDP of $14 billion. When the 2008 global financial crisis shut down lending, these banks' financial collapse brought down the country's economy. (Source: AP, Iceland teeters on the brink of bankruptcy, October 7, 2008)

Haarde and Gialadottir negotiated a $10 billion bailout from the IMF to insure Iceland's bank deposits. Iceland asked its neighbors Luxembourg, Belgium, and the UK to insure bank deposits of the branches in their countries. (Source: Guardian, Iceland sees IMF decision with a week, October 16, 2008)

Iceland's Bankruptcy Aggravated the Global Financial Crisis:

Iceland's economic collapse affected the rest of Europe, since Iceland's banks both expanded their retail services in Europe and heavily invested in foreign companies. Iceland's Baugur is the largest private company in Great Britain. Icesave, the online arm of Landsbanki, froze withdrawals during the crisis, affecting depositors throughout Europe.

Since the government has been unable to maintain the value of the krona, many have suggested Iceland join the EU and adopt the euro as its currency. Iceland is already a member of the European Economic Area, a trade association that follows many EU rules. However, Iceland's fishing industry is opposed, since it has clashed with European countries over fishing rights.

Why Iceland's Homeowners are Protesting:

Before the crisis, both inflation and interest rates were in the double digits. This caused many Icelanders to add second mortgages using foreign currencies, since interest rates were lower. When the krona has dropped, they suddenly faced mortgage costs that were double the price in krona at the same time housing prices were falling. (Source: IHT, Iceland is all but officially bankrupt, October 9, 2008)

Could Iceland's Bankrutpcy Happen in the U.S.?:

The U.S. government has invested a total of $5.1 trillion in stemming the banking crisis. This is more than one-third of annual production and, if left unfunded, would substantially raise the U.S. debt, currently over $10 trillion. Furthermore, it is still unclear if the amount invested will be enough.

Although this is not as bad as Iceland's situation, it will have similar effects on the U.S. economy - a declining dollar, less trust in U.S. financial markets, and a much slower-growing economy for decades to come. (Source: IHT, U.S. consolidates financial risk-taking in Washington, October 18, 2008)

Is it possible for the U.S. economic situation to create a collapse in government like Iceland's? Probably not, since our economy is larger and more resilient.

However, much of the outcome depends on the resiliency of the American people. Will we take to the streets if unemployment skyrockets? Or will we show our true nature as a people, and cut our personal spending, take on an extra job, and help each other? This economic crisis is a wake-up call for each of us to decide who we are, and whether we will accept responsibility for our own economic situation. Article update January 26, 2009

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