Iceland is a small country in big trouble.
During the heady times of economic growth, its banks expanded operations far beyond what the country could possibly support. When the global financial crisis arrived, all three collapsed. Millions of depositors in Britain and the Netherlands would have lost their savings.
Fortunately, when banks collapse nowadays, governments intervene. The governments of both Britain and the Netherlands guaranteed the accounts of their citizens. In total, this cost the countries approximately 3.9 billion (or $5.3 billion).
Understandably, said countries were also angered at picking up the tab of Iceland’s failed banks. The root of Iceland’s current troubles lies in their demands that Iceland repay the 3.9 billion. To force Iceland’s hand, Britain—in a rather mean gesture—used anti-terrorism laws to freeze Iceland’s financial assets. This helped crush the country’s economy.
Now, there are two problems with the demands of Britain and the Netherlands. Firstly, Icelanders really do not want to repay the money. To the average citizen, suffering for the mistakes of a few bankers smacks of unfairness. Giving money to what many view as a big bullying country is also unpopular. In a recent referendum on the question, 93 percent of voters rejected a deal to repay Britain and the Netherlands.
Secondly, it’s practically impossible for Iceland to repay the money. The country’s population, after all, numbers only around 300,000. The 3.9 billion in debt amounts to almost half of its GDP. Imagine if the United States owed $6.5 trillion to another country because of Goldman Sachs.
The best step for Britain and the Netherlands would just be to forgive Iceland’s debt—or, if that fails, to negotiate a very generous deal. Developing countries have their debt relieved all the time; there’s no good reason for Iceland to be an exception.
Perhaps the United States can lend a hand. 3.9 billion is a lot for Iceland, but practically nothing for a country of America’s size. We may not even need to actually spend money to help Iceland; Britain, after all, still owes the United States 40 billion pounds (inflation-adjusted) that it borrowed to fight World War II.
More fundamentally, this situation may end very badly for the West. Iceland’s predicament brings to mind the massive reparations Germany faced after World War I—a situation which ended disastrously for all countries involved. Hostility toward Britain and the Netherlands is already quite high in Iceland, and it will likely only increase. Last November, the president of Iceland accused its neighbors of betraying Iceland during its time of need.
There may come a time when the West is likewise in dire straits, whether it be war, economic peril, or something else. It may need all the help it can get. Then Britain and the Netherlands may rue taking a country like Iceland for granted. In the best case scenario, Britain and the Netherlands get their 3.9 billion, and Iceland forgives and forgets. In the worst case—one of those “unknown unknowns”—their bullying may end up costing the West far more than 3.9 billion.