<TABLE cellSpacing=0 cellPadding=0 width="100%" border=0><TBODY><TR>Will Britain end up like Iceland?
</TR><!-- headline one : end --><!-- Author --><TR><TD class="padlrt8 georgia11 darkgrey bold" colSpan=2>By Julia Werigier & Nelson Schwartz
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London - An island nation that bulked up on debt and lived beyond its means. A plunging currency. A financial system edging towards nationalisation.
With the pound at a multi-decade low and British banks requi-
ring ever-larger injections of taxpayer cash, it is no wonder that observers have started to refer to London as 'Reykjavik on the Thames'.
While that judgment seems exaggerated, there are uncomfortable parallels between Iceland's recent financial downfall and Britain's trajectory. Equally important, news that widening bank losses in Britain have necessitated another round of government life support provides a stark example to the United States.
Washington's attempts to stabilise financial institutions have failed so far as well. And now, the Obama administration, along with the rest of the world, will watch Britain to see what a bank nationalisation may look like, and what it may suggest for American banks.
Ordinary Britons have a more basic worry. After relishing the boom that transformed the drab Britain into Cool Britannia, they fear that the disheartening economic stagnation of the 1970s may return.
The pound - a symbol of British independence from the continent that is revered nearly as much as the Queen - is now down nearly 29 per cent against the US dollar from a year ago.
There has been a steady drumbeat of gloomy economic news for months, and the mood in Britain has darkened starkly in recent days.
Last Monday, the Royal Bank of Scotland (RBS) warned that its losses for last year could hit £28 billion (S$58 billion), even as Prime Minister Gordon Brown announced a second bailout package for the troubled banking sector worth tens of billions of pounds. Ultimately, the British rescue effort could cost at least £350 billion, with some estimates ranging far higher.
But in contrast to last autumn, when Mr Brown's first bailout plan was highly praised, this package has been greeted with anxiety. While few question the need for a quick response, the sheer scale of the borrowing being discussed, as well as the existing debt levels among corporations and consumers alike, alarm many analysts and economists.
'I fully back what the government is doing, but there is a risk of being Iceland on the Thames,' said Mr Will Hutton, an economic expert and the executive vice-
chairman of the Work Foundation, a non-profit research firm. 'And the more the sterling falls, the greater our liabilities in terms of what we owe.'
The pound fell to US$1.3618 last Wednesday - its lowest level against the US dollar since September 1985 - before recovering to US$1.3922.
Even more than their American counterparts, borrowers in Britain turned to local banks to
fuel a real estate boom that was as much a national pastime as a rational decision about what to buy. Household debt as a percentage of disposable income hit 177 per cent in 2007, compared with 141 per cent in the US.
Now, with housing prices dropping and institutions like RBS buckling, the British economic outlook looks even bleaker than the landscape in the US and the euro zone, the countries that use the euro.
The British economy is expected to shrink by 2.9 per cent this year, compared with a 2.6 per cent drop in the euro zone and a 2.1 per cent contraction in the US, according to Mr Gilles Moec, a senior economist at the Bank of America in London.
To make matters worse, he said, Britain is facing a wave of deficit spending as tax receipts fall and the costs of unemployment benefits and other services rise. He predicted that the budget deficit will equal 9.4 per cent of gross domestic product (GDP) this year, compared with 4.9 per cent in the euro zone and 8.4 per cent in the US.
'It is scary,' he said. 'It reminds me of what you could find in southern Europe 15 years ago during the worst years in Italy or Greece.'
British stocks have followed the pound lower in recent days as well. The benchmark FTSE index fell 2.1 per cent last week, led by a plunge in the shares of many leading banks.
The government already controls a majority share in RBS, but the prospect of full nationalisation of the bank has alarmed investors. Shares of RBS plunged 64 per cent in just three days last week.
The prospect of nationalisation haunts other troubled banks as well. Barclays is down 33 per cent and Lloyds Banking Group is off 54 per cent.
As in Iceland, banks, real estate and other financial services boomed in London in recent years, even as other swathes of the economy withered.
In recent years, this sector has been responsible for about half of total job growth in Britain, even though it accounts for only about 30 per cent of the economy, according to Mr Peter Dixon, an economist at Commerzbank in London.
Consumers were also lulled into taking on more and more debt by the unusually steady economic expansion that Britain enjoyed until last year, Mr Dixon said. Growth averaged 2.7 per cent annually over the past decade.
'The last 10 years were phenomenally stable, with volatility at its lowest point since the 19th century,' he said.
But that prosperity camouflaged a steadily weakening manufacturing base, unlike in Germany, where the industrial sector is a relative counterweight to the outsize problems of financial firms.
For all the debt weighing down British banks, though, Iceland's situation was far worse before the government was forced to nationalise the banking sector last autumn as the krona collapsed.
British bank assets total about 4.5 times the country's GDP.
In Iceland, on the other hand, they were 10 times as large as the GDP, said Mr Hutton, the Work Foundation executive. IHT
</TR><!-- headline one : end --><!-- Author --><TR><TD class="padlrt8 georgia11 darkgrey bold" colSpan=2>By Julia Werigier & Nelson Schwartz
</TD></TR><!-- show image if available --><TR vAlign=bottom><TD width=330>
</TD><TD width=10>
<!-- START OF : div id="storytext"--><!-- more than 4 paragraphs -->
London - An island nation that bulked up on debt and lived beyond its means. A plunging currency. A financial system edging towards nationalisation.
With the pound at a multi-decade low and British banks requi-
ring ever-larger injections of taxpayer cash, it is no wonder that observers have started to refer to London as 'Reykjavik on the Thames'.
While that judgment seems exaggerated, there are uncomfortable parallels between Iceland's recent financial downfall and Britain's trajectory. Equally important, news that widening bank losses in Britain have necessitated another round of government life support provides a stark example to the United States.
Washington's attempts to stabilise financial institutions have failed so far as well. And now, the Obama administration, along with the rest of the world, will watch Britain to see what a bank nationalisation may look like, and what it may suggest for American banks.
Ordinary Britons have a more basic worry. After relishing the boom that transformed the drab Britain into Cool Britannia, they fear that the disheartening economic stagnation of the 1970s may return.
The pound - a symbol of British independence from the continent that is revered nearly as much as the Queen - is now down nearly 29 per cent against the US dollar from a year ago.
There has been a steady drumbeat of gloomy economic news for months, and the mood in Britain has darkened starkly in recent days.
Last Monday, the Royal Bank of Scotland (RBS) warned that its losses for last year could hit £28 billion (S$58 billion), even as Prime Minister Gordon Brown announced a second bailout package for the troubled banking sector worth tens of billions of pounds. Ultimately, the British rescue effort could cost at least £350 billion, with some estimates ranging far higher.
But in contrast to last autumn, when Mr Brown's first bailout plan was highly praised, this package has been greeted with anxiety. While few question the need for a quick response, the sheer scale of the borrowing being discussed, as well as the existing debt levels among corporations and consumers alike, alarm many analysts and economists.
'I fully back what the government is doing, but there is a risk of being Iceland on the Thames,' said Mr Will Hutton, an economic expert and the executive vice-
chairman of the Work Foundation, a non-profit research firm. 'And the more the sterling falls, the greater our liabilities in terms of what we owe.'
The pound fell to US$1.3618 last Wednesday - its lowest level against the US dollar since September 1985 - before recovering to US$1.3922.
Even more than their American counterparts, borrowers in Britain turned to local banks to
fuel a real estate boom that was as much a national pastime as a rational decision about what to buy. Household debt as a percentage of disposable income hit 177 per cent in 2007, compared with 141 per cent in the US.
Now, with housing prices dropping and institutions like RBS buckling, the British economic outlook looks even bleaker than the landscape in the US and the euro zone, the countries that use the euro.
The British economy is expected to shrink by 2.9 per cent this year, compared with a 2.6 per cent drop in the euro zone and a 2.1 per cent contraction in the US, according to Mr Gilles Moec, a senior economist at the Bank of America in London.
To make matters worse, he said, Britain is facing a wave of deficit spending as tax receipts fall and the costs of unemployment benefits and other services rise. He predicted that the budget deficit will equal 9.4 per cent of gross domestic product (GDP) this year, compared with 4.9 per cent in the euro zone and 8.4 per cent in the US.
'It is scary,' he said. 'It reminds me of what you could find in southern Europe 15 years ago during the worst years in Italy or Greece.'
British stocks have followed the pound lower in recent days as well. The benchmark FTSE index fell 2.1 per cent last week, led by a plunge in the shares of many leading banks.
The government already controls a majority share in RBS, but the prospect of full nationalisation of the bank has alarmed investors. Shares of RBS plunged 64 per cent in just three days last week.
The prospect of nationalisation haunts other troubled banks as well. Barclays is down 33 per cent and Lloyds Banking Group is off 54 per cent.
As in Iceland, banks, real estate and other financial services boomed in London in recent years, even as other swathes of the economy withered.
In recent years, this sector has been responsible for about half of total job growth in Britain, even though it accounts for only about 30 per cent of the economy, according to Mr Peter Dixon, an economist at Commerzbank in London.
Consumers were also lulled into taking on more and more debt by the unusually steady economic expansion that Britain enjoyed until last year, Mr Dixon said. Growth averaged 2.7 per cent annually over the past decade.
'The last 10 years were phenomenally stable, with volatility at its lowest point since the 19th century,' he said.
But that prosperity camouflaged a steadily weakening manufacturing base, unlike in Germany, where the industrial sector is a relative counterweight to the outsize problems of financial firms.
For all the debt weighing down British banks, though, Iceland's situation was far worse before the government was forced to nationalise the banking sector last autumn as the krona collapsed.
British bank assets total about 4.5 times the country's GDP.
In Iceland, on the other hand, they were 10 times as large as the GDP, said Mr Hutton, the Work Foundation executive. IHT
