Banking Bullies

If you followed the financial collapse of Iceland at all, you'll know that before the crash, Icelandic bank accounts became quite popular in Europe, particularly in Britain.  By virtue of paying extremely attractive interest rates, Icelandic banks enticed foreign savers to put billions of dollars into their savings account.

When the crash came, unfortunately, Iceland didn't have a depository insurer capable of covering the losses.  The governments of Great Britain and the Netherlands decided to bail out their own citizens . . . and then, in a nice touch, to strongarm the Icelandic government to pay them back.  This is beyond shameful, as if America decided to send Mexico a bill for its border enforcement.  The Icelandic government is not responsible for the financial committments of larger (and at this point, better heeled) states.

Clive Crook is as disgusted as I am:

Iceland, a country of  300,000 people, is being asked to assume a debt of $6bn (that's $20,000 apiece). It is an outrageous imposition. Iceland's president is right to repudiate the deal.

Britain and the Netherlands were wrong in the first place to reimburse depositors beyond the capacity of the Icelandic insurance fund. Since they did, British and Dutch taxpayers should be on the hook for this, not Icelandic taxpayers. And regardless of that, the means by which pressure has been applied to Iceland--including, believe it or not, the UK's briefly designating it a terrorist state--are an outrage. If Iceland is wondering whether it still wants to be a member of European Union after this, who can blame it?

More to the point, shouldn't other countries be wondering if it isn't time to block capital coming from Britain and the Netherlands?  After all, their governments seem to believe that accepting foreign investment creates some sort of unlimited taxpayer liability for the recipient country.  Iceland, sadly, is not in a very good position to resist this bullying.  But other countries are, and should make it clear that there are even bigger potential bullies on the block.

Update:  Daniel Davies makes a reasonably persuasive case for the defense.  The problem, I think, is that comparisons of countries to companies always break down pretty rapidly.  Public corporations are ultimate legal creations of the state.   States are, well, states.  What they do may not be right, or smart, but it is just not governed by similar problems or constraints.

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Megan McArdle is a columnist at Bloomberg View and a former senior editor at The Atlantic. Her new book is The Up Side of Down.

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