The latest VoxEU column by Willem Buiter and Anne Sibert on the rotten state of Iceland:
Early in 2008 we were asked by the Icelandic bank Landsbanki (now in receivership) to write a paper on the causes of the financial problems faced by Iceland and its banks, and on the available policy options for the banks and the Icelandic authorities.
The OUCH! part comes at the end:
Iceland’s circumstances were extreme, but there are other countries suffering from milder versions of the same fundamental inconsistent – or at least vulnerable – quartet:
(1) A small country with (2) a large, internationally exposed banking sector, (3) its own currency and (4) limited fiscal spare capacity relative to the possible size of the banking sector solvency gap.
Countries that come to mind are:
and even to some extent the UK, although it is significantly larger than the others and has a minor-league legacy reserve currency.