John  Browne

As a final bailout framework for Greece continues to elude negotiators from France and Germany, the situation on the ground in Athens continues to deteriorate alarmingly. Protests have turned increasingly violent and riots have occurred in the most sensitive portions of the Greek capital.

The demonstrations have taken a political toll on the ruling socialists who recently passed the latest austerity measures with the slimmest parliamentary majority. Indeed, Louka Katseli, a former labor minister of the present government was expelled from the party as a result of her opposition to the latest austerity deal that paved the way for an immediate infusion of 110 billion euros of EU and IMF bailout funds.

The growing popular unrest and political wrangling portend an election defeat for the government of prime minister George Papandreou. Many have speculated that the growing dissatisfaction will force an election much earlier than the currently scheduled election of 2013. This begs the question: "What policies would be pursued by a new Greek government with respect to their debt obligations?

I would suggest that the next leadership coalition would likely look to similar choices made by the government of Iceland, when a similar crisis struck the tiny Nordic island in 2008 and 2009.

During the bubble years earlier in the last decade, the Icelandic economy was one of the world's leaders in debt issuance per capita, and a highly leveraged financial sector helped make Iceland an economic superstar for many years. However, it also exposed the tiny country to the first tremors of the global financial crisis. When creditors panicked and started pulling money out of Iceland's bank, the tiny economy was soon overwhelmed, and plunged quickly towards bankruptcy.  

When faced with the insurmountable and reckless debts, a cascading recession, and the demands of the international political elite for more debt and austerity, the government of Iceland put it to their citizens. In early 2009, with a vote of 90 percent, Icelanders chose to default, leaving foreign investors, bankers and governments, holding much of the losses. The event stands as a stark reminder to the dangers of lending to overly indebted borrowers.

As a result of the default, the Icelandic Krona fell sharply, at one point dropping more than 70 per cent against the euro. A recession of some 5 percent followed. However, as a result of its debt repudiation, the Icelandic economy did not die. In fact, in the ensuing two years, the Icelandic economy has shown signs of improvement. Indeed, Bloomberg has reported that, "Iceland is doing better than anyone could have hoped."


John Browne

John Browne is the Senior Market Strategist for Euro Pacific Capital, Inc.
TOWNHALL FINANCE DAILY

Get the best of Townhall Finance Daily delivered straight to your inbox

Follow Townhall Finance!