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Saturday, December 27, 2008

WSJ: "How Iceland Rattled the World"

Yesterday, at the tail end of a post about Ukraine, I wrote that I still didn't fully understand what happened in Iceland. Well, speak of the devil: today, the WSJ ran a long article (starting on A1, stretching across two pages inside) which broke it down pretty well:

DECEMBER 27, 2008
The Isle That Rattled the World:Tiny Iceland Created a Vast Bubble, Leaving Wreckage Everywhere When It Popped

I'll post some key excerpts later..but the short story is:
  • massive growth in the banking sector via leverage--via debt and deposits--but a lot of those liabilities were denominated in foreign currencies (e.g., loans from German banks, deposits from English individuals)
  • once the global deleveraging started over the summer, and banks around the world pulled back their credit, the Icelandic banks were unable to roll over their funding, esp as those sources of funding lost confidence in the Icelandic currency
  • this then led to a crisis of confidence among their deposit base...

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