Euractiv reports about the political struggle in Iceland of how to deal with the country’s overwhelming exposure to the financial crisis and its debt to the UK and the Netherlands in particular:

The plan calls for Iceland to make payments over 15 years, with an initial 7-year grace period. Some 2.3 billion pounds ($3.8 billion) paid out by Britain and 1.2 billion euros ($1.7 billion) by the Netherlands are to be treated as loans. The revision calls for a ceiling on the sum Iceland will pay beyond the money raised by the sale of Landsbanki assets.

Up to 4 percent of Iceland’s gross domestic product could be paid to Britain in sterling terms from 2017 to 2023 and up to 2 percent in euro terms to the Netherlands, according to a draft document on the bill obtained by Reuters.

Iceland’s exposure to the financial sector is massive. It’s banks held assets worth nine times (yes 900%) of GDP! This meant, as Willem Buiter put it: the banks were not only too big to fail but also too big to be saved! The breakdown of the banking sector took the government with it and crippled the economy for the foreseeable future.

The UK’s exposure is about half that of Iceland (450% of GDP). Given that the government had to guarantee most, if not all, of this £6 trillion industry let’s hope that the worst is really over and the guarantees will never have to be paid out. This could cripple the UK government too.

As for Iceland, at least EU membership would provide a much more robust economic framework for the future.

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