TALLINN - The reality of Europe's economic situation sank in last week as Iceland's economy buckled, rendering the Nordic state the first victim of the global credit crisis. Iceland's financial system collapsed on Thursday Oct. 9 after three major banks 's Glitnir, Landsbanki and Kaupthing 's went under and were subsequently nationalized. The government then shut down the stock exchange, triggering all trade in krona to cease due to foreign banks' refusal to accept the currency, even at bargain rates.
Despite taking every measure to avoid it, expert analysis suggests that Iceland was left with little choice but to turn to the International Monetary Fund (IMF) for emergency assistance 's a move that labeled Iceland the first victim of the global economic crisis.
"Iceland is bankrupt. The Icelandic krona is history. The only sensible option is for the IMF to come and rescue us," said Arsaell Valfells, a professor at the University of Iceland. The situation has lent credibility to the IMF's recent claim that the world economy is facing the most dangerous financial shock in mature markets since the 1930s, and has caused questioning of the defiant optimism floating about the Baltics.
The Baltics, along with much of Central and Eastern Europe, is facing a market downturn for the first time; leading to inexperienced reactions to the crisis said Estonia's former PM and current minister of the economy, Juhan Parts.
"The market economy has ups and downs. This is many people's first experience with that," Parts said, alluding to the region's persistent optimism despite the warning signs. However, by and large the Baltic reaction to the Iceland fiasco has been one of insistent denial that the same dangers are applicable. The leaders of Estonia, Latvia, and Lithuania have all conveyed that the circumstances effecting Iceland's collapse are not relevant to the Baltic economies.
"It is impossible to compare Lithuania to Iceland. The small and open economy of Iceland was brought down by huge external liabilities to financial institutions," said Lithuanian Prime Minister Gediminas Kirkilas.
Similarly, Latvian Prime Minister Ivars Godmanis also pointed to inherent differences between his country and Iceland to brush aside concerns.
"The difference to Latvia is that Iceland had a very high income per capita, and that income was invested into securities, where the volume exceeded the country's gross domestic product by three to four times ... Latvia has a completely different situation," Godmanis said.
On the other hand, Estonian Prime Minister Andrus Ansip alluded to the Baltic's strong ties to Swedish banks as a primary reason to negate concern; echoing sentiments made by bank representatives across the three states.
"The central role of Scandinavian banking groups is a stabilizing factor for the Baltic countries in the current global financial market turbulence," said Anssi Rantala, economic analyst for Nordea Finance.
Yet not everyone sees the situation in the same light.
The involvement of Scandinavian banking in the Baltics is frequently perceived as being damaging to those banks rather than beneficial to the region, a scenario highlighted by Swedbank's current problems.
Additionally, the Latvian lat is currently being earmarked for impending depreciation, with the National Australia Bank issuing a note to clients suggesting that a 'massive devaluation' of the currency was imminent.