Iceland Is Bankrupt, But What About Their Creditors?

In a post today, Paul Kedrosky links to a long article detailing the sad story of Iceland's fall into bankruptcy and financial ruin. It's a sympathetic look at what the people of Iceland are facing.

Easy access to 100 per cent mortgages has seen a change to the traditional pattern of young Icelanders living with their parents until their mid-twenties. The suburbs of Reykjavik have grown by a third in the past decade, most of it housing for first-time buyers. Whole new neighbourhoods have emerged. New streets house young couples, many with children, most with two cars in the drive and furnished with the best that Ikea can provide. All bought with 100 per cent loans, many in foreign currencies.

It's all falling apart and the people of Iceland are in deep trouble. While their tale is pitiable, does the article have the situation exactly reversed?

With 100% credit, the Icelanders imported real goods and built real houses. In exchange for the products of others' labor, they paid them off in what are now worthless pieces of paper. I wonder if there will be repo companies coming over from, say, Germany, to reposess the BMWs. If an Icelandic family defaults on a Japanese loan, will the Japanese kick them out of their home and send a family over from Tokyo to move in?

The people who are really getting the short end of this are the ones holding on to the payments and loans from the Icelanders. Unless fleets of bulldozers show up in Reykjavik and start flattening the place, the Icelanders will still have those homes and their creditors will have nothing.

The people of Iceland imported more than they paid for. I'm not sure if they're the ones we should be crying over.