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Abandoned by the gods
Oct 23, 2008

Thousands of Manitobans have a special fondness for the tiny North Atlantic nation of Iceland. It’s logical, since Icelanders were one of the first major groups to settle in this province following Manitoba’s 1870 entry into the Canadian Confederation. When the Icelanders came to Manitoba in 1875, they were so hopeful they were commencing a new life in a new land that they named their first settlement Gimli, which has been translated into English as “home of the gods,”or “paradise.”  

The residents of what was first known as New Iceland eventually thrived and spread to other communities across Manitoba and North America. In fact, the settlers from Iceland were so successful they eventually had only a mystic remembrance of their ancestral island home. What was told to descendants of the first settlers was that it was hardship and few prospects of economic well-being which had forced the Icelanders to abandon their island for Manitoba. As well, they were eternally grateful that the Canadian government gave them the opportunity to improve their lot in life.

During their occasional visits, these descendants marveled at the stark beauty of the tiny island, but also saw how hard the people struggled to earn a living. The people were happy and relatively prosperous in their own fashion, but not on the North American scale.

That changed a few years ago. Iceland became a small nation of big banks following the deregulation of its banking system in the 1990s. Iceland once had stringent banking rules, but decided the road to riches was to follow the American banking model.

Icelandic banks became popular havens for British municipalities, hospitals and charities attracted by the savings account interest rates as high as six or seven per cent. The three big banks on the island began to dabble in international financial networks. Numerous bank branches were opened in other countries. Times were good. The people were flush with money. The first-ever billionaire in Iceland’s over 1,000-year history was created just two years ago. 

The banks had plenty of cash, which was promptly lent out around the globe. Soon, the banks had assets 10 times the gross domestic product of the nation. “In other words, they really had a lot of money out there,” Michael Corgan, an association professor of international relations specializing in Iceland, told BU Today writer Caleb Daniloff.

“As long as the system was working right and there were no bumps or slackening or loss of confidence, they were doing fine,” Corgan told the Boston University newspaper columnist. “But if the banks ever went bad, there’s no way the government could back them up. And things went bad. The mortgage meltdown in the United States was like a volcano erupting under the water, and there was a tsunami.”

It’s a good analogy since Iceland was formed as a result of volcanic activity, and what happened within the space of just 10 days was volcanic in its intensity. Iceland was struck hardest by the economic tsunami. The Icelandic central bank issued a statement that jobs had “disappeared virtually in a blink of the eye, demand has declined preciptuously and by all measures, expectations are at a low ebb.” The Krona, the national currency, lost half its value against other currencies and trading on the Krona was stopped. Icelandic companies can no longer obtain foreign currency unless it can be proved it is for fuel, food or medicine.

The disaster was of such epic proportions that the Icelandic government was forced to step in and nationalize all three of the nation’s largest banks, although to little effect. The economic tsunami was so devastating that the island of only 320,000 people had to receive a $6 billion bail-out from the International  Monetary Fund and European and Japanese banks. The country once hailed as the most livable in the world had been relegated to the poorhouse in the wake of the U.S. sub-prime meltdown that has reverberated across the globe.

The crisis was of such magnitude that the British government began to panic and invoked its 2001 anti-terrorism laws to freeze the assets of Landesbanki in Great Britain, which subsequently  bankrupted the one remaining solvent Icelandic bank. While the British government is guaranteeing the deposits of individuals affected by the Icelandic banks’ failure, local governments aren’t as lucky and face cash shortages which could result in service cuts.

But Iceland is not alone. Ireland, once regarded as the Celtic tiger in economic circles, has been plunged into recession due to the bursting of its housing bubble. The Irish government was forced to embark upon the first rescue of banks in the world by guaranteeing deposits after the island nation’s banks began to suffer from liquidity shortages.

The three Tigers of the Baltic Sea — Estonia, Latvia and Lithuania — are forecast to join Iceland in seeking an IMF bailout, as is the young democracy of Ukraine. In the case of Ukraine, its spiralling inflation (31 per cent in May) and a decrease in the value of the nation’s currency and stocks has crippled its economy. As well, banks are facing what is termed “challenging times” after near-term risks increased considerably, according to the global credit rating agency Fitch Ratings, as reported by the Associated Press.

Thousands of Manitobans can claim Ukrainian descent — followed by Mennonites and Icelanders, the third major wave of European immigration to the province. The descendants of the original settlers, who fled first Tsarist and then Communist domination, hoped for a new life in a new land. After the overthrow of the Soviet yoke in 1991, Ukrainian descendants expressed the sentiment Ukraine finally had a chance to thrive because of its new-found freedom. 

But, the nations with so many descendants in Canada have been brought to their knees by the meltdown of the world’s greatest economy. Fortunately, the prospect of a better life remains in the Canadian haven. For all its ties to the U.S., Canada has been relatively protected from the economic tsunami that battered other countries. The one thing that sets Canada apart is that its banks didn’t fall into the trap of indiscriminate and disastrous deregulation based on the American model. Canada is not completely immune, but as Finance Minister Jim Flaherty has pointed out, at least our banks are sound.