<TABLE cellSpacing=0 cellPadding=0 width="100%" border=0><TBODY><TR>Iceland collapsed because it borrowed too much: Tharman
</TR><!-- headline one : end --><!-- Author --><TR><TD class="padlrt8 georgia11 darkgrey bold" colSpan=2>By Fiona Chan
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Icelanders protesting against the government's handling of the financial crisis recently. The near-bankrupt country was last year ranked as the world's most developed nation. -- PHOTO: ASSOCIATED PRESS
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<!-- START OF : div id="storytext"--><!-- more than 4 paragraphs -->IN JUST a matter of weeks, Iceland has gone from self-sufficient economic powerhouse to near-bankrupt state, becoming the first country to fall to the financial crisis.
This is because the formerly wealthy 'Nordic Tiger' borrowed much more than it produced in total economic output, said Finance Minister Tharman Shanmugaratnam in Parliament yesterday.
He cited Iceland as an example of how a rich country can collapse suddenly due to an over-reliance on borrowings, which is why Singapore must be careful to use its savings - in the form of its reserves - to finance its spending rather than borrow to do so.
'Icelandics are regarded as very tough, hardy people because of the extreme climate and the way they've had to survive beside some rather large neighbours over the course of their history,' Mr Tharman said, adding that 'up till very recently they were really regarded as the darling of the Nordic model'.
They are 'smart people and rich people', he said.
Iceland's gross domestic product (GDP) last year was estimated at US$19.5billion (S$28.8billion) by the World Bank.
Its per capita GDP was double Singapore's, Mr Tharman added.
But now, Iceland is technically bankrupt and is accepting a US$6billion rescue package from the International Monetary Fund - the sort of emergency bailout one might expect for a developing nation rather than the country ranked last year as the most developed in the world by the United Nations. Singapore was 25th in the rankings.
When the financial crisis hit last month, Iceland's banking sector collapsed under the credit crunch and its three largest banks had to be nationalised. Without enough money in its reserves to pay off its debt, Iceland found its currency, the krona, in free fall and foreign exchange markets closed to it.
This was all because Iceland's reserves amounted to much less than what it had borrowed, Mr Tharman said.
'Its reserves are 25per cent of GDP but its borrowings, largely from its banks, are seven times GDP,' he explained. 'So its system collapsed.'
Foreign banks 'are no longer willing to accept its currency even for trade payments', he said.
This means 'an Icelandic importer wanting to pay for something abroad cannot get his own currency accepted', causing trade to 'come to a standstill'.
'The market shelves are empty and the government is restricting the use of foreign currency to food, oil and medicine,' said Mr Tharman.
Iceland's population of 320,000 is made up of 'strong people, bright people' who used to be self-reliant but became over-exuberant and over-leveraged, 'not realising the importance of erring on the side of safety'. 'Better to be safe,' Mr Tharman concluded. 'If you save, you'll be safe. It's as simple as that.'
</TR><!-- headline one : end --><!-- Author --><TR><TD class="padlrt8 georgia11 darkgrey bold" colSpan=2>By Fiona Chan
</TD></TR><!-- show image if available --><TR vAlign=bottom><TD width=330>
</TD><TD width=10>
Icelanders protesting against the government's handling of the financial crisis recently. The near-bankrupt country was last year ranked as the world's most developed nation. -- PHOTO: ASSOCIATED PRESS
</TD></TR></TBODY></TABLE>
<!-- START OF : div id="storytext"--><!-- more than 4 paragraphs -->IN JUST a matter of weeks, Iceland has gone from self-sufficient economic powerhouse to near-bankrupt state, becoming the first country to fall to the financial crisis.
This is because the formerly wealthy 'Nordic Tiger' borrowed much more than it produced in total economic output, said Finance Minister Tharman Shanmugaratnam in Parliament yesterday.
He cited Iceland as an example of how a rich country can collapse suddenly due to an over-reliance on borrowings, which is why Singapore must be careful to use its savings - in the form of its reserves - to finance its spending rather than borrow to do so.
'Icelandics are regarded as very tough, hardy people because of the extreme climate and the way they've had to survive beside some rather large neighbours over the course of their history,' Mr Tharman said, adding that 'up till very recently they were really regarded as the darling of the Nordic model'.
They are 'smart people and rich people', he said.
Iceland's gross domestic product (GDP) last year was estimated at US$19.5billion (S$28.8billion) by the World Bank.
Its per capita GDP was double Singapore's, Mr Tharman added.
But now, Iceland is technically bankrupt and is accepting a US$6billion rescue package from the International Monetary Fund - the sort of emergency bailout one might expect for a developing nation rather than the country ranked last year as the most developed in the world by the United Nations. Singapore was 25th in the rankings.
When the financial crisis hit last month, Iceland's banking sector collapsed under the credit crunch and its three largest banks had to be nationalised. Without enough money in its reserves to pay off its debt, Iceland found its currency, the krona, in free fall and foreign exchange markets closed to it.
This was all because Iceland's reserves amounted to much less than what it had borrowed, Mr Tharman said.
'Its reserves are 25per cent of GDP but its borrowings, largely from its banks, are seven times GDP,' he explained. 'So its system collapsed.'
Foreign banks 'are no longer willing to accept its currency even for trade payments', he said.
This means 'an Icelandic importer wanting to pay for something abroad cannot get his own currency accepted', causing trade to 'come to a standstill'.
'The market shelves are empty and the government is restricting the use of foreign currency to food, oil and medicine,' said Mr Tharman.
Iceland's population of 320,000 is made up of 'strong people, bright people' who used to be self-reliant but became over-exuberant and over-leveraged, 'not realising the importance of erring on the side of safety'. 'Better to be safe,' Mr Tharman concluded. 'If you save, you'll be safe. It's as simple as that.'
