The first sovereign debt crisis in the EU…Faroe Islands

A superb case study on the same by Jon Danielsson and Hermann Oskarsson.

The current EZ crisis is not Europe’s first sovereign- debt crisis. This column shows parallels can be drawn from an all-but-forgotten episode, i.e. the 1990 Faroese crisis. Just like Greece, the Faroes got into difficulty because of excess borrowing facilitated by a currency union with an AAA-rated partner undeterred as the sovereign debt spiralled upwards. In the Faroese case, the crisis was eventually resolved when political necessities outweighed the cost of the bailout.

I am not going into details. But a great read.

Parallels with current EZ crisis:

There are many parallels between the Faroese crisis and the ongoing European sovereign-debt crisis, especially Greece. Both countries got into difficulty because of excess borrowing, facilitated by belonging to a currency union with an AAA-rated partner. The creditors implicitly assumed the debt was somehow underwritten, and fiscal misconduct prevented by the rules of the greater community. In neither case, did the senior partner seem all that concerned, even as the sovereign debt spiralled upwards.

In the Faroese case, the crisis in state relations was eventually resolved when political necessities outweighed the cost of the bailout. It did help to have representation in the parliament of the main protagonist.

What do Greeks do in this case? Get Greeks elected in German parliament? 🙂

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