Not only does politics make for strange bedfellows, but so does desperation. Iceland is looking to borrow over $5 billion from Russia to shore up its banks. Um, Iceland is a member of NATO, or at least is now. As reader Jørgen commented,
Russia backstopping Iceland? What is the pay-back? Keflavik?
I guess this resembles blackmail of EU: If you don’t rescue us, Putin will.
Reading the Reuters story on this surprising turn of events, it appears that Iceland is not willing to seek assistance from the IMF, since in the Asian crisis, it imposed reforms that were seen as draconian (and many believe contained counterproductive elements).
Update 7:15 PM. I thought Jørgen was kidding. Even if he was, he was spot on. The Spectator confirms the idea (hat tip reader RB):
But what price will the Russians demand for their bailout? A highly-placed source in Reykjavik tells Coffee House that Iceland might look kindly on requests from Russia’s military to use America’s former military base in Iceland. America closed its Naval Air Station at Keflavik Airport two years ago, handing back the Nato facility to the Icelandic government.
Iceland took over its second largest bank, propped up a battered currency and sought on Tuesday a 4 billion euro ($5.44 billion) loan from Russia to help tackle a crisis threatening to overwhelm the island nation.
Russian Finance Minister Alexei Kudrin said Moscow viewed positively the request from Iceland, whose premier said it had faced a risk of “national bankruptcy.”
“The result will be announced after negotiations,” Kudrin said.
Prime Minister Geir Haarde said Icelandic officials would travel to Moscow on Tuesday or Wednesday to discuss terms for the loan to bolster the country’s foreign reserves.
“With this, like everything else, nothing is certain until it’s certain,” Haarde told a news conference.
He said Iceland would not default on its sovereign debt…..
Yves here. If you believe that, I have a bridge I’d like to sell you.
So volatile was the currency that Iceland’s central bank was forced to introduce a currency peg at a value of 131 per euro. It was last trading around 150.
An International Monetary Fund spokesman said an IMF staff team was in Iceland and Norway said it was ready to discuss help but had heard nothing from Reykjavik.
Its reluctance to ask for IMF help was also noted when G7 deputy finance ministers discussed its situation during a conference call on Monday evening, according to a government official from one of the Group of Seven industrial nations.
“Japan proposed using an IMF facility to help Iceland, but Iceland did not want to ask the IMF for money,” the official, who was familiar with the content of the phone consultations, told Reuters, speaking on condition of anonymity.
“Iceland does not want to be singled out as a country that needs IMF help. Even last summer, Iceland preferred to ask the central banks of some Nordic countries for help rather than go to the IMF for money.”….
The central bank said a Russian loan would substantially strengthen Iceland’s foreign reserves and support the crown, which Haarde predicted would should strengthen significantly when more normal trading conditions resumed.
“Four billion euros would be more or less what Iceland needs to cover the whole banking system assets with their reserves,” said Elisabeth Gruie, currency strategist at BNP Paribas.