Category Archives: Political Risk

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Iceland Says “No” to Paying Back Billions

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Iceland has not had much good publicity in the past two years, and it doesn’t look like that will change any time soon.

Back in 2008, Iceland’s government and economy essentially collapsed, leaving the country’s 304,000 residents in despair after what is now called the largest banking collapse in economic history.

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Now into 2010, the country is still reeling from the financial crisis that severely weakened the value of its currency, caused a 90% drop in capitalization of its stock exchange and decreased its GDP by 5.5% in the first six months of 2009.

But Iceland’s residents were not the only ones hurting.

The millions of foreign depositors who had chosen the country’s banks as a safe-haven for their savings were faced with the grim reality that every penny that had deposited there was now frozen. Though Britain and the Netherlands stepped in to refund the savers, Iceland is still in debt to those two countries.

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And today, news reports claim that the country’s president, Olafur Ragnar Grimsson, refused to sign a bill to repay a $5 billion debt to Britain and the Netherlands.

The Icelandic banks and their online subsidiaries with their high interest rates had attracted many savers from Britain and the Netherlands. When the banks collapsed 15 months ago, the British and Dutch governments stepped in to refund their savers who lost money. Britain and the Netherlands then negotiated a deal with the Icelandic government to be reimbursed for the money they paid out, and that bill was passed by the Icelandic parliament. Last week, though, President Olafur Ragnar Grimsson refused to sign the bill.

Grimsson references the Icelandic Constitution, stating that a referendum must now happen since he has received a petition signed by a quarter of the country’s population, which urged the president to renegotiate the terms of the repayment.

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 The loan carries a 5.5% interest rate and some feel that the if Iceland were to repay with the current terms, it could potentially cause a national bankruptcy.

Steingrimur Sigfusson, Iceland’s finance minister, understands that the issue is extremely unpopular among residents, but that in order to move forward and continue with economic restoration, the country must meet its obligations.

Whether a referendum happens or not, Sigfusson says, there is something deeper going on in Iceland–a moving away from what he calls the culture of neo-liberal greed and a returning home to its Nordic roots.

Whether or not Iceland will be able to dig itself out of this financial, political and economic conundrum and return to its Nordic roots will remain to be seen. Taking into account the country’s recent track record and its diminutive size in both population and world power, the odds are against it.

Top 10 Risks for 2010

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Well, according to Eurasia Group, the number one risk for 2010 is U.S.-China relations.

In their annual “Top Risks” report, the firm’s president, Ian Bremmer, and head of research, David Gordon, announced their top risks today, which states that “2010 is likely to be much more turbulent geopolitically than 2009, when the world was preoccupied with coping with the global financial crisis, but saw no big geopolitical crisis.”

  1. U.S.-China relations — The firm sees the relationship between these two powerhouses deteriorating significantly due to China’s reluctance to take more of a leadership role, as was seen during the Copenhagen climate conference. Other issues affecting the relationship include Beijing’s economic partnership with the U.
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    S., the resulting higher tariffs on Chinese exports, differences in cap and trade beliefs and issues involving cyber-security, among others.

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  2. Iran — Eurasia Group points to Iran as the biggest “purely geopolitical risk in 2010.” The report focuses on the country’s struggling government, its nuclear program and its reaction to ensuing sanctions. “The Iranian regime looks increasingly like a cornered, wounded animal,” the report states. “In 2010, it’s likely to act like one.
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    “

  3. European fiscal divergence — It seems the fiscal challenges in Greece, Ireland, Spain, Portugal and Italy have created a massive area of financial risk in Europe. Eastern Europe faces escalating risks as well, especially if European Central Bank liquidity measures are curtailed.
  4. U.S. financial regulation — Eurasia Group feels 2010 will prove to be a more difficult year for Obama than 2009. The firm points to unemployment remaining high, very challenging financial regulatory reform and mid-term elections affecting this reform. “Both the Americans and Europeans are aware of the risk of driving the financial industry into the ground with too much (or too drastic) regulation or taxation,” the report states. “But as reform becomes an election-year domestic battleground, the need to serve political interests will be increasingly at odds with the need to create an efficient framework for regulatory reform.”
  5. Japan — Japan has had to endure sweeping political change and the new Democratic Party of Japan’s (DPJ) efforts to “limit the influence of bureaucrats and industrialists” has created an atmosphere of higher policy risk. Other concerns regard the uncertainty of the DPJ and the party’s less favorable disposition toward the business community, which is likely to harm financial confidence, further affecting economic woes.

The remainder of their top 10 list can be viewed here. It’s interesting to note the “red herrings” section listed at the bottom, which includes information on Iraq, the Persian Gulf, Russia, the dollar and New York and London.

People Power

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At the moment, a substantial amount of public outcry, including riots and mass demonstrations, are being reported throughout Iran as supporters of presidential candidate Mir Hossein Mousavi have taken to the streets, protesting the outcome of that country’s recent presidential election. The official announcement from the Iranian government that President Mahmoud Ahmadinejad won the election in a landslide immediately threw up a number of red flags indicating possible voter fraud.

From a distance, the situation looks pretty unsavory, with riot police beating down protesters, foreign journalists getting hassled by interior security agents, and even reports that the BBC Persia satellite link is being jammed from somewhere within Iran itself. All of this points to a regime that clearly has a stake in keeping a lid on things, which one must assume could include a questionable electoral outcome. Why else employ such heavy security?

While the Western world in particular raises questions over this situation, the business implications of the election pose a less headline-worthy but potentially more serious impact. Iran is currently OPEC’s second-largest petroleum producer and, as such, remains heavily dependent on world oil prices.

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Fluctuation in price per barrel has taken a heavy toll on Iran, which supports its internal economy through heavy public spending.

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According to the Coface Handbook of Country Risk 2009, Iran experiences inflation in excess of 25%, thanks in part to poor governance and the long-term impact of international sanctions against the country. It is that very inflation, among other things, that has driven so much discontent within the country. And it seems likely that if the current election results stand as is, or if Iran’s recently announced probe into them proves to be nothing more than a charade, additional sanctions could follow.

What will happen when one of the world’s leading oil producers is put under even greater international economic pressure? What will happen when its own economy worsens? What will happen when an entire generation of citizens no longer fear the state’s ability to keep the peace? It all adds up to a most unusual display of instability in a country that holds the keys to a great deal of economic power. As we saw during the last two years of oil fluctuation, weird things can happen when the price of oil goes off the rails.

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And what’s happening in Iran is looking more and more like a train wreck.