FP looks at five countries on the verge of following Iceland to economic ruin and political meltdown.
- By David KennerDavid Kenner is the Middle East editor at Foreign Policy. He is based in Beirut, Lebanon, and has been with FP since 2009 (a long time, he knows). He worked for FP previously in Cairo, where he covered the early days of the Arab Spring, and before that in Washington. He has attended Georgetown University and the American University of Beirut and has reported from Libya, Egypt, Gaza, Turkey, Lebanon, and Iraq.
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Economic damage: The financial crisis has gotten so severe in Britain that it has earned London a new nickname in the international media: Reykjavik-on-Thames. The question in Britain is no longer when the economy will enter a recession, but when it will enter a depression, with many bracing for a slump that could rival the 1930s in severity. GDP fell 1.5 percent in the fourth quarter of 2008, and the European Union estimates it will contract another 2.8 percent in 2009. Unemployment is projected to balloon to more than 8 percent by year’s end, and an estimated 23 percent of adult Britons currently consider their debt level unmanageable.
The British downturn is especially severe because the U.K. is more dependent on its financial sector than most developed economies. All told, British banks currently hold about $4.4 trillion in foreign debt (which, until recently, included a large amount of Iceland’s debt). For a $2.1 trillion economy, that’s a heavy load to bear.
Political fallout: Prime Minister Gordon Brown initially earned voters’ confidence by seizing a leading international role in the response to the crisis but, as the recession deepened, British sentiment has turned against the government. A recent poll showed that almost 6 in 10 Britons think the latest economic recovery measures will fail and gave the opposition Tories a 15-point edge over Brown’s Labour Party.
The government has already nationalized much of its financial sector, and investors fear that another round of nationalization might be around the corner. Government intervention has become so pervasive that nearly half of the economy will consist of state spending in the coming year. This, in turn, has earned Britain another nickname: Soviet Britain.
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Economic damage: Latvia is arguably the one country that most resembles Iceland, and not just because of the cold climate. The small, developing country’s lofty growth rates in recent years were fueled by heavy investment from elsewhere in Europe, massive foreign debt, booming consumption, and minimal savings. After growing at an extraordinary 12.2 percent rate in 2006, Latvia’s economy is now the weakest of the 27 EU member states. A European Commission report forecast that Latvia’s GDP is set to contract 6.9 percent in 2009 and a further 2.4 percent in 2010, with unemployment climbing into the double digits by next year. The International Monetary Fund has approved a $7.3 billion bailout package for Latvia, but a long road to recovery remains.
With financial markets tightening and housing markets crashing down to earth, Latvian businesses have ground to a halt and the government has been forced to cut services to the bone. A new program will involve a 25 percent cut in the state budget, 15 percent wage reductions, and widespread layoffs.
Political fallout: The financial crisis threatens not only Latvians’ livelihoods, but it also poses a danger to their nascent democratic system. The government’s popularity currently sits at about 10 percent. In the largest protests since the rallies against Soviet rule in the 1980s, more than 10,000 Latvians gathered earlier this month in the capital of Riga to protest the government’s mismanagement of the economy. Some demonstrations turned violent, as angry youths threw rocks and eggs at police and lobbed cobblestones at the Parliament building.
The government has initiated a crackdown of its own, unleashing its security forces against those guilty of economic pessimism. When a university lecturer speculated that the crisis might cause a devaluation in Latvia’s currency, he was arrested and held in jail for two days.
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Economic damage: The Greek economy, burdened by a debt-to-GDP ratio of more than 90 percent, is one of the shakiest in the European Union. The adoption of the euro had previously fueled Greece’s economic boom, but it is now one of the primary obstacles to getting the country out from underneath its massive debt. The typical method countries use to alleviate their debt is to depreciate their currency, lessening the real value of their liabilities. But with a single currency in use across the euro zone, Greece no longer controls its own monetary policy. Faced with the strain of falling tax revenues and the need to fund a bailout program, Greece could be forced to withdraw from the euro zone or default on its debt.
Standard Poor’s cut the country’s sovereign debt rating earlier this month due to concerns over its rising deficit. Now, Greece must pay 5.6 percent to finance its 10-year debt, 2.5 percentage points more than Germany. As the financial crisis continues, expect the rift between the haves and the have-nots in the EU to widen further.
Political fallout: Outrage over a police shooting spilled over into widespread rioting throughout Greece in December. More than 150 banks were targeted by youths during the first days of the riots. Greece’s bleak economic situation is widely considered to be the underlying cause of the unrest. Greek banks had invested heavily in development in the Balkans and, with the onset of the financial crisis, found themselves dangerously overextended. The center-right government was forced to bail them out, but at the cost of drawing funds from social welfare programs. The image of the Greek government handing bags full of money to wealthy financiers while services were cut for the general populace has decimated the government’s credibility.
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Economic damage: Ukraine’s export-oriented economy and its volatile political system have combined to make the country one of the hardest-hit eastern European markets in the financial crisis. Steel exports are at the heart of Ukraine’s economy, and plummeting international demand has brought the country’s mills to a near standstill. The production of metals needed to manufacture steel dropped 43 percent in December 2008 compared with that month in 2007, when Ukraine ranked as the world’s eighth-largest steel producer. Ukraine was only saved from complete economic collapse by a $16.5 billion loan from the IMF in October, the largest package given to a country in Eastern Europe. But recently, the Parliament approved a 2009 budget with a planned deficit of 3 percent, in violation of the terms of the IMF loan, which requires a balanced budget. This could delay the next, desperately needed installation of IMF funds, due in February.
Political fallout: Ukraine’s politicians, meanwhile, are bickering while their country goes bust. In early October, Ukrainian President Viktor Yushchenko dissolved Parliament and called for early elections in a bid to weaken his rival, Prime Minister Yulia Tymoshenko. Tymoshenko responded that it would be irresponsible to burden Ukraine with the costs of an election during the crisis, and blocked funding for the elections. A poll conducted in December found that only 26 percent of Ukrainians thought the government could tackle the country’s economic crisis. If the politicians’ bickering continues to harm Ukraine’s economic standing, both ruling parties could pay for it at the next election whenever that may be.
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Economic damage: Nicaraguan President Daniel Ortega, an old U.S. enemy from the Cold War, explained the financial crisis by stating, God is punishing the United States. But the ripple effects from the crisis will likely reach all the way to his own country. Nicaragua’s economy is heavily dependent on remittances, with the central bank estimating that Nicaraguans abroad send back between $800 million and $1 billion every year. The U.S. economic downturn means that fewer Nicaraguans will have money to send home. The financial crisis has also pushed down the price of coffee, Nicaragua’s main export, as investors have abandoned the commodity market.
Political fallout: To make matters worse, Ortega’s increasingly authoritarian tendencies have earned him the enmity of developed countries, which Nicaragua depends on for aid. In the run-up to municipal elections in November, Ortega’s government disqualified two opposition parties, sent police to intimidate his regime’s leading critics, and banned independent local and foreign observers from monitoring the election. In response, the United States and six European countries suspended an estimated $150 million in development aid to the Western Hemisphere’s second-poorest country.
Ortega might come to regret his schadenfreude at the U.S. economic downturn when it’s his country that is feeling the effects.