In the past 10 days, Ireland have unilaterally guaranteed their banks' deposits and dated senior and subordinated debt to the tune of €400bn; Greece have put a 100% guarantee on all Greek deposits; and Spain have upped their deposit guarantee to €100k per person and set up a €40bn fund to purchase distressed toxic assets from Spanish Banks.
All these steps have been taken in the midst of the senior European leaders from Germany, France, and the UK, convening pointless meeting after meeting. They've made vague statement after vague statement. Accused each other of causing the crisis in the first place and, finally, decided upon a pathetic €50k per person deposit guarantee. Jean-Claude Trichet has continued to obsess about inflation and insist that he has no part to play in helping to ease the crisis, while maintaining European base rates at 4.75%. As bad as this sounds, Mervyn King hasn't even bothered to comment for the past two weeks. However, the result is that the unilateral actions of countries like Ireland, Greece, and Spain, have completely undermined the authority of the ECB and the European Union as a concept. The vast majority of market participants view this as an inevitable backlash against the ECB's thinly veiled predilection to tailor fiscal policy to suit the German economy alone, while the smaller European countries struggle to cope.
The fallout would seem to be that the ECB has lost all credibility and the EU itself stands on extremely shaky ground. Gordon Brown and Alistair Darling have cemented themselves in the annals of history as infamous Hamlet-esque procrastinators, while the market panic in the City of London pointed firmly at the source of all that is rotten in the state of the UK economy (namely, confidence in anything). The pitfalls of disappointing the free market forces of equity and debt traders can be most acutely seen by the hesitation of US congress in passing their banking bailout bill. The relief that greeted the announcement of the Fed beginning to use its €700bn war chest in the US commercial paper market lasted all of 30 minutes, and the market then proceeded to fall again. The corollary of this reaction can be seen in the reaction of the Australian, Israeli, Spanish, and Irish markets to unexpectedly decisive intervention by their respective fiscal policy makers. If you promise the moon but, deliver the sun, the reaction is glorious in its relief. However, If you promise the moon, dither, delay, and finally deliver the moon, the free market forces will crush you with its disappointment.
While all this has been happening, possibly the most significant development has been in a non-EU country in the north Atlantic. Smack-bang in the middle of new US-Russian shipping routes revealed by the Arctic circle retreat and, on the front line of the old Cold War divide, Iceland has played a quietly significant part in global foreign policy for many years. A founding member of Nato and a geographically crucial ally of the US throughout World War II and the Cold War, Iceland has long been a crucial pawn on the international chess board.
It first came to significance during WWII when US military intelligence discovered Hitler's plans to use Iceland as a launch base for his V-2 missiles to attack American soil. Ever since, the US has kept the Icelandic nation close and have, bar a hiatus from 1946-1951, maintained a military presence there since 1940. Such has been the importance that US foreign policy has consistently placed on Iceland that, they were given a very generous share of the Marshall plan aid package at the end of the war, despite not one bomb landing on its soil. In 1952, the US intervened to solve a fishing rights dispute with the UK, which saw the banning of all imports of Iceland fish to the UK. Prompted by the offer by the Soviet Union of an oil-for-fish agreement, the US jumped to Iceland's side and politely made the UK see sense. In 1955, President Eisenhower publicly begged the question why the US didn't just buy up the entire export of Icelandic fish. In 1956, British authorities caved in to end the dispute and concluded that, to "increase the economic dependence of Iceland on the Soviet bloc would also strengthen the hands of the communists in Iceland, whose aim is to deny the United States the use of the vital air base at Keflavik and to bring about the withdrawal of Iceland from the North Atlantic Treaty Organisation." Echoes of a recent squirmish in the former easter-bloc.
Given this history, there has always been recognised within the credit markets, an implicit guarantee by the US to step into the breach to rescue Iceland in any major catastrophe. Today, the Icelandic Prime Minister, Geir Haarde, revealed that they "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." Most news agencies around the world assumed this barb to have been directed towards the EU however, it would seem they have all missed the reference to their historical 'friend', the US. The subsequent dash into the arms of Russia and the talks currently taking place to negotiate the terms of a €4.5bn loan are an inevitable product of the US economy's current malaise and a turning of the diplomatic screw by Moscow following the crushing of Georgia's petulant attempt to underline its alliance with Washington and, its desire to join NATO. Yet another example of the impossibility of fighting on multiple fronts, so explicity underlined by our Russian comrades.
We'll never know for sure what conditions will be placed on this loan but, should the US presence at Keflavik airport be 'encouraged' to discontinue, we could only conclude that Russia is taking every chance to flex its new found muscle in the direction of its long-time adversaries.
The Cold war is alive and well and the new front is in the north-Atlantic. While the credit crunch plays itself out, save a thought for how the political landscape is changing. Will the EU and the Euro survive? Will Ireland become an even more strategic US economic and military ally? And, will Norway finally crack open its breathtakingly large piggy bank to take advantage of the global equity market autumn sales? Only time will tell. Eyes-down on the bingo cards folks!
MNG
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