So what’s up with Iceland’s ‘national bankruptcy’? A possible explanation

by Jerry Guo on

Hidden far away in the North Atlantic, Iceland may seem like one of the last outposts for globalization to reach. One economist stressed that a century ago, Iceland was essentially Ghana in terms of economic development. And even as late as the 1970s, Iceland still remained one of the poorest countries in Western Europe, with a major portion of its economy reliant on fishing. Yet today, Iceland is, according to the United Nations Human Development Index, the most developed country in the world, with one of the highest rates of life expectancy, literacy, and per capita GDP.

So how has Iceland gotten where it is today and what exactly went wrong in the last month?

The answer to both is financial globalization. The very forces of global integration, which led to deregulation of the banking sector and creation of a national stock exchange, nearly pushed this distinctly first-world country a few weeks ago into “national bankruptcy,” in the words of Prime Minister Geir Haarde.

What’s really scary is that the on-going Icelandic crisis has been in large parts an external crisis of confidence. Its three major banks were quite well-behaved, with little exposure to the “toxic” subprime loans we’ve all heard so much about. But ultimately foreign lenders to Iceland’s banks did not see the government as a credible lender of last resort. In other words, although the banks were too big to fail, they were also too big to bail (out).
On many fronts, Iceland’s economic report card is sparkling clean: the country boasts of a fully-funded pension, a strong financial regulatory agency, low unemployment, and high growth. In particular, Iceland’s banks have become a success story for financial integration, having fueled much of the country’s economic growth in the past decade. While the fishing industry’s share of GDP declined from 16% in 1980 to 6% in 2006, the finance, insurance, and real estate industries together saw an increase from 17% of GDP to 26% in the same period.

However, with a population of 300,000, or roughly one-fifth the population of Manhattan, this tiny island did not have the internal capital to support growth in the financial sector-they had to seek financial integration with the global system. Thus, these newly privatized banks quickly began to access foreign credit (and customers) in Scandinavia, the US, Japan, Canada, Australia, and the UK. One now-infamous Icelandic bank, Landsbanki, started IceSave, an UK-based Internet bank, in October 2006, which accumulated £7.3 billion deposits from 300,000 British and Dutch accounts. By the first quarter of 2008, assets of Icelandic banks had ballooned to 14,069 billion ISK (Icelandic krona) or $176 billion, roughly eleven times the size of the country’s 2007 GDP.

Though financial liberalization enabled capital to flow easily into the country, capital was able to flow out just as easily. Investors saw the country, even with its strong financial fundamentals, as the weakest link of the ongoing global financial crisis.

The most dramatic consequence of the collapse and subsequent nationalization of the big three Icelandic banks could be seen in the UK, where the British government had to resort to anti-terrorism laws to freeze $6.8 billion in Icelandic assets.

Iceland’s meltdown presents potential consequences beyond the global financial sector. Many of its domestic companies are now multinational corporations that depend on a viable currency regime and access to foreign credit for continued operation. Two particularly prominent businesses are Actavis and the Baugur Group. In the 1990s, Actavis, a generic-producing pharmaceutical, had less than 100 employees and served only the Icelandic market.

Now the company is active in 40 countries and employees 11,000 people. Its collapse would produce a spillover effect that could cause other associated businesses to go bankrupt. The greatest possibility of this domino theory at work is with Baugur Group, which directly owns a large number of UK retail conglomerates, including Woolworth’s and Somerfield (as well as an equity stake in Saks Fifth Avenue).

Ultimately, on October 25, Iceland became the first Western country since 1976 to accept an International Monetary Fund (IMF) bailout. Discussions are now on-going for an additional $4 billion loan by Norway, Sweden, Finland, and Denmark (after initial talks with Russia came under harsh fire).

Paradoxically, greater financial liberalization must be pursued to salvage Iceland’s economy. With its banking sector’s sheer size in comparison to the national economy, Iceland must abandon the krona in favor of the euro, as the EU is a much more credible lender-of-last-resort than the government of a small Scandinavian island.

One hedge fund manager earlier this year described the almost sure-fire profit of shorting Iceland as the “second coming of Christ.” Ironically, through the financial integration of the 1990s, the island’s banking sector had itself turned into a sort of bizarre hedge fund, with an enormous asset-liability mismatch to the size of the underlying economy.

Granted, although the three banks’ fundamentals were relatively strong, with little exposure to subprime securities, they were ultimately early victims of the global credit crunch. With no wholesale credit to roll over their loans, they had to be nationalized, which set off a chain-reaction of events that impacted the UK, Germany, and several other nations across the globe. Now, paradoxically, more financial integration, in the form of Iceland moving from the krona to the Euro, is needed in order to stave off another banking crisis and for long-term stability and growth of the Icelandic economy.

So what does all this mean to a seasoned traveler like you?

  • Book yourself on the next flight to Iceland. The krona has fallen in value by half over the last couple months. That means a national 50% off sale.
  • But this joyride may be over soon. The IMF $2 billion bailout is designed to stabilize their currency. Translation: things will cost more.
  • Set your net wider. Other European countries, particularly Hungary, Ukraine, Spain, and Germany, are financially weak right now.
  • And whatever you do, don’t put your money in an Icelandic bank. Even if they offer you a small village as collateral.

Tuesday Travel Trivia (Week 2)

by Aaron Hotfelder on

Welcome back to Tuesday Travel Trivia (aka Gadling T-party), and congratulations to Week 1 winners, Joe and Stolen, who were the only two to get all ten questions correct.

Here are this week’s questions, and remember, no using the internet (or anything else) to look up the answers. Good luck!

  1. What famous TV travel host is the editor of the 2008 edition of The Best American Travel Writing?
  2. Which African nation was forced to print a series of 10-million dollar bills earlier this year to combat rampant hyper-inflation?
  3. Name the famous American author who once wrote, “Travel is fatal to prejudice, bigotry, and narrow-mindedness.”
  4. Angel Falls is the world’s highest waterfall at over 3,200 feet. In which South American country is it located?
  5. Which of the first five US presidents does not have a capital city named for him?
  6. Who told Colbert Report host Stephen Colbert that he had named one of his aircrafts “Air Colbert”?
  7. What is the name of the type of projection used in the map above?
  8. What’s the name of the enclave-country that is located entirely within South Africa’s borders?
  9. In what states (or countries) were Barack Obama and John McCain born?
  10. Which of these countries is often not considered a part of Scandinavia: Norway, Sweden, Finland, or Denmark?

Look below the fold for last week‘s answers:

  1. South America has only two countries that are completely landlocked. What are they? Paraguay, Bolivia
  2. What’s the three-letter New York Stock Exchange symbol for Southwest Airlines? LUV
  3. The Petronas Towers are the tallest twin towers and office buildings in the world. In what country are they located? Malaysia
  4. Whom do most experts agree is the most powerful man in Iran? Supreme Leader Ali Khameini
  5. In the movie Rain Man, Tom Cruise’s character Charlie tells Raymond, played by Dustin Hoffman, that every airline in the world has crashed at one time or another. But Raymond disagrees, citing the perfect safety record of which airline? Qantas
  6. Which country is more populous, Canada or Mexico? Mexico with about 100 million people (Canada has 33 million)
  7. In 1994, an American citizen named Michael Fay was arrested in Singapore for theft and vandalism, and he was given a somewhat unusual punishment. What was it? caning
  8. By area, which country is the largest ‘Stan? [e.g. Tajikistan, Uzbekistan, etc.] Kazakhstan
  9. True or false: More than 1,000 people live in Greenland. True (56,000)
  10. What is the name of Lonely Planet’s online travel forum? Thorntree

Toronto Airport Opens Lounge for All Passengers

by Josh Lew on

Toronto Pearson International has announced that it is opening a lounge for all passengers. Before you start envisioning a scene similar to the chaotic free-for-all at the local buffet, you should know that entry is $35. Pretty steep for those who just want to hang out and see if they can snag a few peanuts off the bar.

What does the $35 get you? Lounge-users have access to wireless internet, printers, large flat-screen televisions and some quality food and drink. $35 might seem a bit steep, but not as expensive as upgrading to business-class or first-class just so you can spend your layover in the lounge. The lounge is in Pearson’s Terminal 1, near the international pier.

Terminal 1 is actually one of the more pleasant places in the world to wait for a connecting flight. Travelers could easily chew up a couple of hours wandering between the numerous art installations and shops in the terminal.

Voting for Barack Obama, a small New Hampshire town gets its 15 minutes of fame

by Jeffrey White on

As the cliche goes, blink and you’d likely miss driving through Dixville Notch, New Hampshire.

The town is clustered along a bend of US 26, the crags of Table Rock above, and surrounded by rolling hills that look like a painter’s palate in the fall. There isn’t a town here per se, but rather a golf and skiing resort called the Balsams. The Balsam’s is Dixville Notch’s town hall, community meeting place and pretty much its entire economy: Most of the town’s residents work here, and live in small homes scattered across the hillsides.

The Balsams is reason enough to stop in Dixville Notch. But every four years this little speck on the map gets about a 15-minute dose of fame as being the first place in America to cast ballots in presidential elections.

At midnight, Dixville Notch’s 21 registered voters crowded into the Ballot Room at the Balsams and voted. At about 12:15 this morning, the town was called for Barack Obama: He beat John McCain 15 votes to 6.Another small New Hampshire town, Hart’s Location, also voted. Its 29 registered voters split 17-10 in favor of Obama, with two write-ins for Ron Paul.

Both communities have a bit more than 100 residents between them.

Dixville Notch has been casting the nation’s first ballots continuously since 1960 (Hart’s started voting early in 1948, but abandoned the practice for more than 30 years before bringing the tradition back in 1996).

New Hampshire law says that once every registered voter has had his say in a particular town, voting stations there can close and votes can be tallied. In Dixville Notch, the whole process takes around 15 minutes – after which a broadcast goes around the world reporting who is officially leading on election day long before the rest of the country rouses from bed and slinks off to the polling stations.

So, a picturesque little resort halfway between New Hampshire’s White Mountains and the Canadian border gets to bask in the global spotlight for a little bit.

I was staying at the Balsams last year, in October, having made my way down from Canada. The day I arrived it happened that the resort was holding voter registration for townspeople. Eighteen had showed up to register.

“We’re unique,” a man named Alex at the front desk told me. “Every registered voter gets his own voting booth. We make sure of it. So, the whole process is over pretty quick.

“We used to have as many as 30 registered voters,” Alex added. “But it seems to go down every year.”

Still, hoards of media crowd in at the resort at midnight on election day. The number of visitors — i.e. other New Hampshire residents who drive to Dixville just to watch the vote, routinely outnumbers the people actually voting.

The nearest town, 12 miles away, doesn’t go to the polls until 8 a.m.

Election year or not, people staying at the Balsams can check out the ballot room, a musty meeting hall lined with green carpet, its walls festooned with pictures and newspaper articles from past elections.

There’s a plaque: “Dixville Notch: First in the Nation.”

Amtrak opens rail pass sales to US residents, makes it hardly worthwhile

by David Breisch on

Perhaps some of you are familiar with European rail passes that are available for sale – they are sold to non-European residents in varying numbers of quantities and lengths – but the general idea is that foreign tourists can purchase these passes and ride around on the European rail network for cheaper than if you purchase a handful of train tickets separately. Amtrak has also maintained a USA Rail Pass program for non-US residents, for the, you know, person-and-a-half that visits the US for the sole purpose of riding our stellar train system.

Well, fear not, loyal US readers, because you too can now experience the joy of owning a USA rail pass. You can buy a pass good for 15 days or eight travel segments ($389); 30 days or 12 segments ($579); or 45 days or 18 segments ($749). A segment is defined as getting on and off one train or Amtrak-operated bus. The pass is good for coach travel only, although you can upgrade for a surcharge if space is available. Also, you can’t just ride a train with a pass; you must also get a ticket from an Amtrak ticket office. Finally, the pass can’t be used on the Auto Train or high-speed Acela Express.

So that’s the sum of the deal – but would it ever be worth it for anyone? Read on for my incredibly detailed and researched (well, not really) analysis.

Okay, let’s say you’re a US resident actually interested in buying one of these things. Any of the three passes works out to about $48 per segment, if you use them all (the most expensive pass is a little cheaper per segment, but negligibly so.) A quick few queries in Amtrak’s reservations system, however, reveals that a short-distance trip usually only runs about $30. So to really take advantage of the pass savings, each of your segments needs to be longer, say, more than 500 miles.

Problem is, trips of more than 500 miles on a train take at least 12-18 hours – some running upwards of 24-48 hours if you take a real long-distance train. Granted, in a real life situation, some of your segments would be shorter and some would be longer. Realistically, if you want to actually save money with a pass, your average trip length would need to be about 15 hours or so. That’s 120 hours – or five straight days – of train-riding in 15 days. You could do it, but you wouldn’t have time to do much of anything at any of your layovers. On the bright side, you would save at least $500 off of buying all those segments individually.

The question remains, though: who would ever actually buy this thing and save enough money to make it worthwhile?

(Via USA Today)