The Next Iceland
.
.
Until a couple of months ago, Iceland was considered the fourth most productive country in the world with a per capita GDP of $65K. After fishing declined, Iceland opted not to industrialize itself: too polluting. Instead, they went into biotechnology, software and the like. And most of all, banking.
Iceland’s record did not go unnoticed. It ranked high in the Index of Economic Freedom, with 76.5% Freedom. This is an index calculated by the Heritage Foundation- the folks who loved such icons of freedom as apartheid era South Africa and freedom fighter Jonas Savimbi . Why would Heritage not like Iceland? The corporate tax was among the lowest in the world. They even adopted the flat tax. It is not only by economic measures that Iceland stood out: the life expectancy was among the highest.
Iceland’s banks offered sky high interest rates, drawing in Europeans, especially British. Their banks grew to dominate the economy: money was made without having to smelt ores or actually make something useful. And then it all collapsed. The banks failed, an early casualty of the US mortgage bubble. Once the Bank deposits grow to several times the GDP, no Government can guarantee them. Panic spread. The British Government invoked laws originally targeting terrorists to seize Icelandic Bank assets in the UK. It turns out that Iceland’s economy was based on nothing at all: just the impression that it was a small wealthy country allowed it to raise money from greedy investors.
So who is next? Luxembourg is safe as it is part of the European Union. So is Poland. The Ukraine is definitely vulnerable, but is too big and not rich enough to be comparable to Iceland. San Moreno and Monaco are too small to bother with.
Switzerland comes to mind. They never joined the EU, preferring to retain their historic neutrality. Or may be, to protect secret bank accounts. Two banks that cater to the wealthy, UBS and Credite Suisse, dominate the Swiss economy. The bad news is that the US Justice Department has been systematically dismantling Swiss Bank secrecy for some years now. They started with Igor Olenicoff, a flamboyant real estate businessman who hid his assets offshore. After getting a guilty plea from him, they worked their way up to his money manager at UBS, Bradley Birkenfeld. Now they are using information gained from Birkenfeld to indict Raoul Weil, Chief Executive Officer of Global Wealth Management & Business Banking unit of UBS. Weil is just one step away from the top: the previous person in that job is now CEO of UBS itself.
The election of President Obama is does not bode well for bank secrecy . It is also under independent attack from French and German authorities. If the Swiss have any sense they will give up on banking secrecy and emphasize more honest services to remain a center of world banking. Third World dictators, drug smugglers and plain old tax cheats will have to find some other way to launder their money.
As if this wasn’t enough trouble, UBS was found to have $60B in `toxic securities’ . These are the same high risk mortgages that brought down American Investment Banks. The Swiss Government had to take over that $60B portfolio. And in addition inject $6B in capital into UBS, in return for a 10% ownership stake. Irate union members are demonstrating in Zurich against curtailed benefits; while executives are paid handsome bonuses for leading their banks into ruin. Sounds familiar?
Unless the EU or the US helps them out, Switzerland will collapse. If you think that is unlikely, you probably also think that General Motors will last for ever without a Government bailout.
The canary in this mineshaft is Lichtenstein. The tiny principality also never adopted the Euro, and uses instead the Swiss Franc as its currency. Lichtenstein is Switzerland’s mini-me. It is the closest place to Iceland in the new World Map.
Please subscribe to our RSS feed!
