Iceland Gets Left Out in the Cold

One of the biggest problems with the United States becoming a debtor nation instead of a creditor is that we really lose any ability to help out our valued friends in times of trouble. As such, the banking crisis in Iceland has forced the government to turn to Russia – who is happy to throw some of its excess liquidity toward the relatively stable instruments of the country in the form of a $5.4 billion loan.

Reykjavik is really not all that happy about it, and seems to display some awareness that this is exactly the kind of deal that can end up outsourcing your Ministry of Foreign Affairs to Kremlin oversight just like Finland. Prime Minister Geir Haarde tells the Financial Times, “We have not received the kind of support that we were requesting from our friends. So in a situation like that one has to look for new friends. (…) In a situation like this it’s turning out that it’s every man for himself, every country for itself, everybody’s taking care of their best interest and that’s what we are doing.“Chris Weafer tells the FT that this loan is much more than an ordinary transaction, as it symbolizes both a clear statement that Russia still has extra cash and will look forward to enjoying support from Iceland on future territorial claims in the Arctic.James Beadle of Pilgrim Asset Management tells the New York Times that “It’s a P.R. stunt to reassert Russia’s position in the global economy of the 21st century.“I believe that this loan demonstrates that Russia continues to have a very good understanding of what Walter Russell Mead would call “sticky power,” and it would do Washington very well to remember how much this financial crisis is costing the United States in terms of its relationships with key allies.UPDATE: From breakingviews.com: “Much better would be a loan from the IMF. This too would come with strings attached, but they would be sensible and financial rather than strategic and dangerous. Stiff inflation targets and budgetary constraints are needed anyway to resuscitate Iceland’s battered economy. An alarmed US may well pressure the IMF to offer a good deal. Unless it wants to become a pawn in a geopolitical power play, Iceland should welcome the fund with open arms.“