UK and Switzerland Could Soon Follow Iceland to Bankruptcy

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It is a shocking thought for many: two countries that were once the hallmarks of financial sobriety - the United Kingdom and tiny and perfect Alpine state Switzerland - are now being predicted as the next victims of financial bankruptcy. Back in October last year, the design-cool and once declared 'best place in the world to live' Iceland, went bankrupt. That left many very shocked, not to mention Icelanders, who now face decades of debt payments to dig themselves out of the mess.

But respected economic historian, TV celeb and best-selling author Niall Ferguson, believes the next countries to 'do an Iceland', will be Switzerland and the United Kingdom. "Switzerland is first in line... and Britain is not far behind," he says.

While earnest Americans have beat themselves up as the world's greedbags and demon seed for the global depression, in fact according to Ferguson, countries like the UK and Germany have been more irresponsible and greedy. If Ferguson is correct in his analysis, it will prove shattering for Europeans and particularly, Brits. Britain's hapless prime minister, Gordon Brown, has repeatedly blamed the US for the current economic crisis, and maintains he has found the way to end 'boom and bust' and he has 'saved the world'.

As Brown said: "I mean what's happened is we've had a banking crisis which started in America; makes me incredibly angry about what happened, the irresponsibility of risk taking and the irresponsibility of not disclosing things...This is an international crisis that has not been generated in Britain."

Banks use what is called 'leveraging' to make investments. This is where banks borrow more than they actually have. A practice that becomes lethal when the assets and investments they have drop in value in an economic slump. 

Ferguson states that leveraging has averaged 12:1 in the U.S., whereas in Europe it was much higher with German banks having an average leverage ratio of 52:1. That's essentially US $52 of debt based money for every US $1 of real assets/money.

This means European claims the US is the worst offender in this crisis, do not hold water.

While Germany can fall back on its high-quality export products to dig itself out of the financial mess, the UK does not have enough to trade with other countries. It has instead relied on its financial services industry to prop up its economy. 

LINKS:

1) More on this topic from Chris Tew at Market Oracle: http://www.marketoracle.co.uk/Article8924.html

2) Niall Ferguson breaks it down in this video: http://fora.tv/2008/10/21/Geopolitical_Consequences_of_the_Credit_Crunch#Niall_Ferguson_The_Benefit_of_the_Credit_Crisis