Will UK go the Iceland way?

Willem Buiter has a great blog but is always difficult to read. It is very detailed and has loads and loads of information and facts. Most of his posts are like a research paper. He says clearly he writes the blog for himself as it helps him.

I had pointed to his superb study on how and why Iceland failed. In taht study he says:

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:

• Switzerland
• Denmark
• Sweden

and even to some extent the UK, although it is significantly larger than the others and has a minor-league legacy reserve currency.

Ireland, Belgium, the Netherland and Luxembourg possess the advantage of having the euro, a global reserve currency, as their national currency. Illiquidity alone should therefore not become a fatal problem for their banking sectors. But with limited fiscal spare capacity, their ability to address serious fundamental banking sector insolvency issues may well be in doubt.

In his latest post, he works on UK economy and provides evidence why UK could go the Iceland way. A must read.