Iceland: The country that became a hedge fund

http://money.cnn.com/2008/12/01/magazines/fortune/iceland_gumbel.fortune/

Iceland: The country that became a hedge fund
Okay, not really. But its main banks and business tycoons took huge risks and its citizens borrowed to the hilt. Now this island nation is paying the price.

By Peter Gumbel, Europe editor
DECEMBER 2, 2008: 6:23 AM ET


(Fortune Magazine) -- On a gloomy morning in early August, more than a month before Wall Street and the world's financial system seized up, a senior aide to Iceland's Prime Minister paid a visit to the Russian embassy in Reykjavík to make a controversial request: Bail us out.

Iceland had one of the richest economies in Europe, but it had a problem. Its three main private sector banks had become so large that their assets amounted to more than ten times the gross domestic product of the country - and there were signs that they might run into trouble.

Iceland had asked its traditional allies for help, but to its consternation, its pleas to the U.S. Federal Reserve, the Bank of England, and the European Central Bank went unheeded. Instead, the answer was always, "Ask the International Monetary Fund" - a drastic step Iceland didn't want to take.

That left Russia. "We knew that talking to them would create a shock, and that was partly the point," says a senior Icelander involved in the démarche. Iceland, after all, is a founding member of NATO and housed a U.S. Navy air base during the Cold War. The Russians sell oil to Iceland but have long sought a much closer relationship.

Inside the embassy, Russian ambassador Victor Tatarintsev listened intently. The seasoned diplomat, a canny political operator reputed to be close to Russian Prime Minister Vladimir Putin, knew an opportunity when he saw one. As he heard the plea, says the Icelandic source, "there was a big grin on his face."

Iceland's Russian gambit did indeed stir a reaction when it became public in early October. "Of course we would not have accepted any political strings," Prime Minister Geir Haarde tells Fortune. "This loan would not have indicated any change in our foreign or security policy."

Still, his phone rang off the hook, and IMF officials rushed to put in place an emergency $2.1 billion rescue package. By then it was too late. Iceland had already become the first nation to fall victim to the global financial crisis.

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Sounds like Iceland has their own version of Bernanke, poor bastards.