British and Icelandic economies closely linked

moneySince January, the value of Iceland’s currency has fallen considerably and international confidence in the country’s banks to cover their foreign debt has suffered. As a result, Iceland is facing the current global credit crunch under much more difficult conditions than many other developed countries.

In order to stop the crisis from spreading, an economist for Landsbanki, Bjorn Gudmundsson, recently suggested that the might of the Bank of England may have to be added to already considerable loans from three Nordic central banks.

Last week the central banks of Sweden, Norway and Denmark made EUR 1.5 billion in emergency credit available to Iceland’s central bank in order to express their confidence in the country and shore up the troubled krona.

Many of the investments that Icelandic banks have gone into debt to acquire are based in Britain, making it in that country’s interests to ensure Iceland’s economy doesn’t sink. Icelanders have borrowed billions from Britain and used the money to fund acquisitions of British companies.

Many financial experts, including Warren Buffet, suspect that Iceland’s sudden slide is the result of an attack by hedge funds that stand to profit from the fall of the Icelandic economy.

Unfortunately, such an attack on Iceland is tantamount to an attack on Britain, and Britain cannot afford to suffer. Already struggling under the global credit crisis itself, Britain is also dealing with a property crash and a significant economic contraction.

Meanwhile, Icelandic banks have posted first quarter results that are much higher than expected and the krona has experienced an upward rally during May. Many international observers speculate that Iceland’s ‘crisis’ has passed its peak.