Ingenial

Iceland to Grenada the story all over the world is pretty much the same. Smaller island nations struggle to stay afloat economically during our global recession. Here are a few examples:

1. Iceland’s economy famously blew up during the banking crisis of 2008. It hasn’t recovered and now refuses to pay its debts to European powers and the International Monetary Fund.
2. Fiji’s been hit hard by a steep decline in tourism from New Zealand and Australia.
3. Rising sea levels may be the least of Grenada’s worries as its debt to gdp ratio is over 120%.
4. 40 percent of the Solomon Island’s GDP already comes from foreign aid. It’s basically a country on Australian life support.
5. Even Japan (the world’s second largest economy after the United States) has been hit hard by the downturn.

Why do island economies suffer more during a downturn? The answer goes deeper than simply a drop in tourism, a rise in fuel prices and a spike in food costs. It comes down to a willingness to take risks.

Island nations often feel that in order to keep up with mainland nations they must borrow more money. Island nations are like the poorest family on the block that puts on the biggest, baddest light show at Christmas time to allay suspicions. As a percentage of their gross domestic product many island nations have an absurd amount of national debt. Here are a select few for reference:

Japan            192.10%
Saint Kitts    185.00%
Jamaica        131.70%
Grenada       120.00%
Iceland         100.60%

Michael Lewis brilliantly described the phenomenon of a smaller nation wanting to copy a larger nation’s success in his Vanity Fair article titled “Wall Street on the Tundra.” He explained how Icelandic fisherman became bankers, stock brokers, and real estate agents nearly overnight carrying with them a brazen penchant for risk left over from days and nights spent on the frigid, dangerous Atlantic waters. They also became cutthroat entrepreneurs. Lewis describes how they dominated the international markets:

A handful of guys in Iceland, who had no experience of finance, were taking out tens of billions of dollars in short-term loans from abroad. They were then re-lending this money to themselves and their friends to buy assets—the banks, soccer teams, etc. Since the entire world’s assets were rising—thanks in part to people like these Icelandic lunatics paying crazy prices for them—they appeared to be making money. Yet another hedge-fund manager explained Icelandic banking to me this way: You have a dog, and I have a cat. We agree that they are each worth a billion dollars. You sell me the dog for a billion, and I sell you the cat for a billion. Now we are no longer pet owners, but Icelandic banks, with a billion dollars in new assets. “They created fake capital by trading assets amongst themselves at inflated values,” says a London hedge-fund manager. “This was how the banks and investment companies grew and grew. But they were lightweights in the international markets.”

Iceland is not an isolated case. It’s easy to hide forgeries and fakes like this when you’re an island. Nobody comes asking and you have no neighbors to cry foul.

The developing story to watch? The Cayman Islands. Once the belle of the banking ball the Cayman Islands are now scrambling to keep foreign investment firms and banks on its shores. In an unprecedented move the nation could offer one million dollar residency deals to wealthy executives giving them them expanded freedom and economic power for the price of -you guessed it- one million dollars. They know they’re in trouble as firms continue to move out.

Why do you think island nations continue to suffer during this global recession? Let us know in the comments.