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Iceland Shivers From Financial Crisis
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Iceland Shivers From Financial Crisis

Economy

Iceland Shivers From Financial Crisis
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ARI SHAPIRO, host:

Now we'll hear about another looming bankruptcy. This time it's not a company that's in trouble, it's an entire country that's at risk. Iceland's banks have debts that add up to much more than the country's entire economy. The government had to rush in to take over many of those banks and ask Russia for a $5 billion loan. Tom Braithwaite is the reporter for the Financial Times in Reykjavik, Iceland's capital, good morning Tom.

TOM BRAITHWAITE: Good morning.

SHAPIRO: Iceland generally is considered to have a very developed economy, so how did it get in to this extreme mess?

BRAITHWAITE: Well, essentially debt, I mean thats whats powered the economy over the last decade and its brought tremendous wealth. Iceland is of the fifth rich nation in terms of GDP per capita in the world. Indeed if you look around the amount of brand new four wheel drive ploughing through the streets is quite impressive but it's all fueled by debt, too much debt from the banks that have funded all this and too much debt from consumers. And now with the liquidity crunch across the world it's payback time and theres a problem.

SHAPIRO: You know, I think we're all familiar with what happens when a company declares bankruptcy, but if Iceland were to declare bankruptcy an entire country, what would that mean? What happens?

BRAITHWAITE: Well, it's a good question we're on slightly unchartered territory, I mean the government said yesterday that it will not default on any bonds that its issued and it has taken steps to nationalize most of the banks, so the three big banks that powered this boom, two of them have already been taken over. It doesn't look like Iceland itself is going to go bankrupt although that is what the Prime Minister has effectively threatened the country with if doesn't bow to the emergency powers that he's inacted. Iceland does have something going on its favors. It's a strong producer of fish for example, it's a big favorite of tourist. So, there are many ways in which this economy - at a country that is only 300,000 people can get some foreign exchange in.

SHAPIRO: Well, tell me about how this problems in Iceland connect with problems that we're seeing in other parts of the world, in the U.S and elsewhere in Europe for example.

BRAITHWAITE: Well, effectively as the same problem has affected U.S. Banks, and U.K. Banks and banks all around the world. Banks effectively are not lending to each other and when they are doing so, they're doing so at high interest rate. So, Iceland's banks which heavily indebted just essentially cannot get the short term funding to continue in business and that's why the government has seized control of two of the big three and that's why the government itself needs a currency from Russia to support its plunging currency. And it's - the sort of problem we've seen all over the world and yet in one sense magnified because it's threatens to take down the whole country. Once said much smaller of course since we're talking about a fairly small island here.

SHAPIRO: Why would Iceland go to Russia for help?

BRAITHWAITE: Well, it says because it turn to its traditional friends, they didn't help. So, I think there's a lot of anger here, the prime minister will not name the countries that turned him down, but there certainly thought to include Britain, Europe and possibly the U.S.

SHAPIRO: And in fact this morning we heard that the British Prime Minister Gordon Brown says the U.K. will take legal action against Iceland to recoup lost savings?

BRAITHWAITE: Well, that's right, a lot of savers in the U.K. have put money into these very high interest rate accounts that the Icelandic banks have been offering. It turns out they were high interest for a reason and that's because they are very risky, as the banks have been ceased by the government the foreign arms have essentially been cut off and left to die. So, there's a lot of U.K. savers worried they may be out of pocket. The British government says they will back them but in turn it might - may sue the Icelandic government.

SHAPIRO: Tom Braithwaite is a reporter for the Financial Times and we reached him in Reykjavik, Iceland. Thank you very much.

BRAITHWAITE: OK, Thanks.

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