|By Robin Bowerman|
21st April 2009
Principal & Head of Retail, Vanguard Investments Australia
Fortunately, Australia has not been exposed to the worst extremities of the world financial crisis that are being experienced through much of the world.
Certainly, personal bankruptcies and corporate failures are expected to markedly rise here. And our retirees and those approaching retirement are particularly feeling the losses in their superannuation savings.
And indeed, the Insolvency and Trustee Service of Australia has just reported that 7169 individuals became bankrupt in the March quarter - a rise of 13.66% over the same quarter of last year.
But a fascinating feature in the April 2009 issue of Vanity Fair magazine closely examines how things went much, much worse for a country that you don't normally read about in relation to world financial dealings. That country is Iceland.
This is scary stuff.
To write his feature, Wall Street on the Tundra, journalist Michael Lewis visited the small fishing country with a population of just 300,000 where thousands of fishermen turned into bankers between 2003 and 2007. They were caught up in the frenzy of trying to make fast money.
"While the US stock market was doubling, the Icelandic stock market multiplied nine times," Lewis writes. Real estate prices tripled in Iceland's capital, Reykjavik. "By 2006, the average Icelandic family was three times as wealthy as it had been in 2003, and virtually all of this new wealth was one way or another tied to its new investment-banking industry [that had been created almost overnight]."
Today, the country is "effectively bust" to use Lewis' words, with its debt at 850% of GDP. Its banking losses alone amount to $330,000 for each Icelandic man, woman, and child.
And when its sharemarket plunged, it fell to pieces - dropping by 85%.
And Iceland is "no longer a country but a hedge fund" in deep trouble, quoting a representative of the International Monetary Fund.
Consider the experience of 26-year-old "Magnus Olafsson" (not his real name). Magnus went from being a fisherman to earning almost $1 million from currency trading for a local bank. Today, such "bankers" are back in their fishing boats, and hauling in the catch.
The country's prime minister is actually advising his citizens to stop banking and to go fishing again.
Lewis ends his piece with the telling words: "When you borrow a lot of money to create a false prosperity, you import the future into the present. It isn't actually the future as some grotesque silicon version of it.
"Leveraged buys give a glimpse of a prosperity you haven't really earned," he concludes.
The Icelandic experience will, hopefully, serve as a lesson to the rest of us about what can go wrong when a herd mentality, crazy market euphoria, high debt, and the smell of fast money combine together. Watch out for next time around!