The headline is from Willem Buiter’s blog.

The government of Iceland is using the threat of a €4 bn loan from Russia in exchange for a 99-year lease on the airport at Keflavik – a former American air base – as leverage to obtain financial support from the West. This is high-stakes poker -not without risk to Iceland, if their bluff is called. I would have securitised the future revenues from hydro and geo-thermal power generation before bringing on the Red Army. It does show, however, that there may be more collateralisable assets around for governments to draw on that one might have thought. Good news for Chancellor Darling.

Buiten’s reasoning (in another post to his excellent blog) is:

A government should only nationalise a bank (let alone most of its banking sector) if it has the fiscal strength to support the bank (or its banking sector). If it does not have the fiscal resources, now and in the future, to restore the banks to solvency, a private sector insolvency problem is transformed into a government insolvency problem. On the whole, the consequences of state default are more serious for the residents of a country than the consequences of a private bank default.

If the banks in question have a large amount of foreign currency debt, maintaining government solvency when the government tries to make all the banks’ creditors whole, requires two distinct resource transfers: an internal fiscal transfer, through spending cuts or tax increases from the domestic private sector to the government, and an external transfer through a larger primary surplus in the balance of payments accounts. Such an external transfer generally requires a depreciation of the real exchange rate and a worsening of the country’s external terms of trade.