A Tale of Four Islands

By Jim McNiven

Let’s pretend that Nova Scotia is an island. Part of it is an island, of course, but the rest is attached to the North American mainland by a strip of land less than 10 miles across. Having pretended that, let’s look at some of the financial messes that islands are having and compare them to Nova Scotia.

We don’t have much to fall back on, economically—no big resource wealth to tap for extra added income, a small economy and a small population. In fact, we represent perhaps 1/500th of the North American economy. We have a sizeable public debt, though not as bad as it was a decade and more ago, but the social safety net is wearing thin and the desire to improve it by borrowing is strong.

Now, let’s look at some other islands with few people and few prospects for wealth. Iceland is an independent country with its own currency and access to a lot of fish. It has a population of ½ of Halifax County, a bit more than PEI. In the early 2000s, some Icelanders figured they could tap a lot of money in other countries and put it to good use. Soon, a lot of Icelanders were seeing fortunes made from bringing in money from Scotland and elsewhere and using it to pay themselves and to buy a lot of assets all around the world, including a lot of sophisticated instruments created on Wall Street and blessed by ratings agencies. We know what happened then—the roof fell in-- and the Icelandic banks, which had assets maybe 100 times the size of the local GDP, couldn’t meet the demands of their depositors trying to get their money out, and went ‘bankrupt’. The lenders/depositors looked to the Icelandic government for compensation, but were told they were big boys and to get lost. Nobody would lend any more money to Iceland, their currency fell to a fraction of its previous value and local financial experts went back to fishing. The hangover was not pretty, but it is pretty well over now.

Then there’s Ireland. It is bigger than Nova Scotia by a factor of 3 or 4, but still small potatoes. However, it is in the EU and the Eurozone. Now the Eurozone is a strange beast. It is a common currency without a central central bank. It has as many central banks as there are countries plus a European Central Bank, which I suppose some hope will soon become a real central bank. Some enterprising Irishmen decided that the game of high stakes finance was for them and away they went. A lot of overseas money came into the country and was lent out to finance domestic real estate development. Office buildings and housing tracts sprang up, far in excess of local needs. There were fantasies that expatriated Irish and others would come to the island for summer homes. There are palm trees in Dublin, as I can attest, but it does rain a bit more than is normal for an island full of vacation homes. When it all went bust, the depositors came running and in a fit of public pride or maybe fear of their place in the Eurozone, the Irish government said it would make good the debts, which, of course were once again big multiples of the size of the local GDP. The EU was there to help a bit. There are a lot of deserted houses and neighborhoods in Ireland and the people are resignedly trying to pay the money back, but it’s a sad place now.

Then there’s Cyprus. It has a many people as Nova Scotia minus Cape Breton and an even relatively smaller economy. Nothing there but the sun that Ireland needs. Maybe there’s a decent offshore gas field, if things can get sorted out about who owns what in that part of the Mediterranean, but not much else. Cyprus is in the EU and the Eurozone as well. The bankers and the government tried a different strategy. They managed to attract a lot of fugitive money from out of Russia, billions of Euros worth, and then used the deposits to invest in some American financial instruments (remember Iceland?) along with a lot of bonds that their sterling sister government (They are all Greeks) had to offer. The Russian oligarchs and other perhaps less savoury characters from that part of the world got a place outside of Russia and in the Eurozone where they could launder their cash, with almost no questions asked. When it all blew up, the Cypriots could not just walk away from their banks’ debts like Iceland did, nor were they about to tighten their belts and try to make good on their regulatory failings like Ireland. Instead, they went right away to the EU for help. The kindly Germans and others suggested that they ‘tax’ all the banks’ depositors enough to pay up on maybe 1/3 of the money owed and the EU would loan them the rest. Of course, the citizenry, in good Greek fashion, rioted and the Cypriot Parliament backed down.  Instead of hitting everybody, they ‘taxed’ only those who had over 100,000 Euros in these banks. So much for the Cyprus safe haven laundering business.  The Russian government seems to be onside, but I doubt the Russian oligarchs are. Tricky business, grabbing money from those guys.

So, what about Nova Scotia? It has no central bank as that is part of the federation. It has the Canadian dollar, analogous to the Euro. It has some fish, some vacation property and even a (good) Russian restaurant on Lower Barrington Street. Its banking system is out of its hands and its Provincial debt is only about 40% of its GDP, not 40 or more times it, as on islands elsewhere. We never had the chance to play with the big boys like Iceland, Ireland and Cyprus did. We just have to plod along, earning our bread the hard way.