Of all the myriad narratives thrown up by the credit crisis, one stands out: a tale of entire countries going bust, Russian loans and even – bizarrely – British ‘anti-terrorism’ legislation.

That story is the peculiar downfall of a nation at the periphery of the European financial system: Iceland. Most well known to the outside world as an esoteric tourist destination and breeding ground for slightly weird musicians, the sparsely-populated island country is not climatically given to agriculture. Its economic activity is therefore split between certain manufacturing industries – notably aluminium smelting – and an enormous financial sector.

The BBC website notes two main factors in the downfall of this sector.¹ Firstly, the Icelandic central bank had adopted a policy of inflation targeting – changing interest rates in order to keep inflation at a certain level. In this period, inflation had tended to be too high; thus interest rates were consistently increased to counterbalance this tendency, resulting in freakishly high rates of up to 15%. This led to mass borrowing in foreign currency, which in turn led the Icelandic krona to an artificially strong position in currency markets.

The second major factor concerned a different side to this run on foreign assets: the three largest banks in Iceland as of early 2008 – Landsbanki, Kaupthing and Glitnir – together possessed over 10 times the country’s entire GDP in foreign assets. This was entirely unproblematic in boom times; however, it is obvious enough from events in America and Britain recently that the ability of the state to guarantee these assets has been the key question in responding to the crisis – hence Hank Paulson’s $700 billion and so on. It is plainly impossible for the ‘undercapitalised’ Icelandic state to pull enough money out of its hat.

The fact, then, that the big banks were much better capitalised than the Anglo-American crunch casualties receded into irrelevance. They found it increasingly difficult to refinance their debts, and with no strong state guarantees were inevitably sucked into the credit spiral. The Icelandic government announced the nationalisation of 75% of Glitnir on September 29, and formally took control of it – along with Landsbanki – on October 7. Kaupthing, inevitably, followed two days later.

The same week, there was another twist, which surprised many of the enthusiastically neoliberal Icelandic establishment’s foreign allies. It emerged that the country was in advanced negotiations with the Russian Federation over a €4 billion loan. Prime minister Geir Haarde very pointedly told a press conference: “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 rejected claims that there was any military dimension to the deal – it had been suggested that a recently-vacated US airforce base may have been opened up to the Russians in order to seal the deal.²

However, it would be naive to rule it out categorically. Certainly, if Russia has managed to procure an airbase on the sovereign territory of a Nato founder-member, it would be a real coup for Medvedev, Putin and their allies.

Elsewhere …

The picture is further complicated by the nature of the Icelandic banks’ entanglements in foreign markets.

Part of the billions of euros of foreign debt accumulated by the banks is in the form of personal deposits made to foreign subsidiaries. In Britain, for example, an internet-based subsidiary of Landsbanki by the name of Icesave attracted $7 billion worth of deposits from 300,000 depositors.³ They were attracted by the aforementioned over-egged interest rates, making Iceland a very attractive place to invest.

An attractive place to invest, that is, until the whole financial sector started to go down the tube. These investors were unhappy to discover, on October 7, that they were no longer able to access their money. The result is bewildering and already infamous – the next day, Alistair Darling announced both that the treasury would foot the £4 billion bill, and that he was pursuing a ‘freezing order’ on that company’s accounts.

The sensational aspect of this is simply that in this instance it was made legally viable by none other than the 2001 Anti-Terrorism, Crime and Security Act – section 4 of which allows a freezing order to be placed on “the government of a country or territory outside the United Kingdom”, provided “action to the detriment of the United Kingdom’s economy (or part of it) has been or is likely to be taken”.⁴ As a diplomatic snub, the use of this legislation rather dwarfs Haarde’s line about ‘new friends’, and indeed the flustered prime minister has reacted indignantly.

It does not end at retail banking either. The previously favourable financial climate allowed Icelandic companies of all kinds to expand massively abroad. Drug company Actavis is now one of the world’s largest producers of generics. And, to return to Britain, the retail investment outfit, Baugur, owns House of Fraser, Debenhams, about half the women’s clothes outlets in any given shopping mall (Jane Norman, Oasis, Karen Millen, etc) and – wryly enough – frozen food giant Iceland.

Until recently it was also involved in talks to buy up Woolworths’ retail operations. Barely six weeks later, however, it is battling rumours of a mass divestment of several of its brands.⁵

Learning the lessons

The most important feature of this narrative is that it has been impossible to confine to Iceland. That country’s financial crisis, if we were to assume it was the only country in the world, should not have happened – as we have noted, the main banks were in a far less precarious position in terms of their capitalisation than Northern Rock, Lehman Bros or even HBOS.

Iceland’s prosperity seemed, as many economies hyperfocused on the financial sector did, very real. Its GDP per capita was among the highest in the world in 2005, at over $40,000. A 2007-08 report from the United Nations Development Programme listed Iceland as the most ‘egalitarian’ country in the world according to its Gini coefficient (the wealth of the poorest 10% compared to that of the richest 10%).⁶ It became commonplace, in that unimaginative way common to business commentators, to describe Iceland as the ‘Nordic tiger’.

Yet this was only made possible by easing the country into a niche in the international financial system, whereby it could become a home for foreign money – and conversely a launch pad for businesses looking to invest elsewhere. All this required an entirely bloated banking system.

That banking system failed because capitalism is fundamentally international. Icelanders cannot eat credit or heat their homes with derivatives any more than other people can. The country was entirely entangled in the global division of labour. Given conditions of crisis – let alone the present crisis, with its dramatic convulsions in high finance – it was always going to be just as susceptible – more susceptible as it turned out – to collapse.

Iceland is not the only such ‘tiger’ to fall foul of the crisis, of course. Ireland is likely to sink deep into recession over the next year. These two countries, along with Norway, Denmark and others, were cited as an “arc of prosperity” by Scottish Nationalist Party leader Alex Salmond, which an independent Scotland could easily join – with the help of its own unsinkable, prudent banks, of course. Now, this bit of pseudo-geography has been transformed into an “arc of insolvency”.⁷

As if the portents from abroad were not bad enough, Salmond has to contend with the fate of two Scottish- based banks, HBOS and the Royal Bank of Scotland. The former had already been confirmed as sold off to the ‘English’ Lloyds TSB before all three banks were ‘recapitalised’ by the government – ie, part-nationalised – to the tune of £37 billion.

Bourgeois commentators right up to Gordon Brown have correctly noted that the material basis for Salmond’s independence plans – shared by the left nationalists of the Scottish Socialist Party and Solidarity – is basically dead. It is clear from the course of events that capitalism in one country is an impossibility. Pity, then, the left apologists for nationalism – to be found all over, but in a particular concentration in Scotland. While the SSP’s Alan McCombes claims that the confluence of North Sea oil (as if Westminster would just hand that one over) and a very “long coastline” (like Iceland’s) makes his “independent socialist Scotland” project viable, reality starkly contradicts this daydream.

If the global dimension of capitalist production can hang entire capitalist states out to dry, what would ‘socialism’ in one country produce other than a barrack dystopia? Capitalism can only be superseded globally – there is no opt-out.

Notes

1. news.bbc.co.uk/1/hi/business/7658908.stm
2. Business Week October 9.
3. Ibid.
4. www.opsi.gov.uk/Acts/acts2001/ukpga_20010024_en_2#pt2-pb1-l1g4
5. investing.businessweek.com/research/stocks/private/napshot.asp?privcapId=3017676
6. hdrstats.undp.org/indicators/145.html
7. The Daily Telegraph October 14.