Each year since 1998, special flights have ferried eager Icelanders 2,600 kilometres to Newfoundland to stock up on Christmas gifts. This year the flights are cancelled. A Newfoundland and Labrador trade mission to Iceland is also on hold. When banks in the cold, isolated European island began failing in early October, Canada’s East Coast suddenly felt the chill.
“It’s definitely a blow,” says Kevin Gushue, the manager of tourism for the City of St. John’s, where anywhere from 200 to 500 Icelanders land and spend up to $1 million during their annual cross-Atlantic shopping spree. Similarly, the Newfoundland government has sent trade missions to Iceland since the late 1990s, and in April of this year signed a memorandum of understanding that formalized the trading relationship between the province and the country. That momentum came to a standstill when Icelandic banks Kaupthing, Landsbanki and Glitnir, caught in the global financial crisis, collapsed.
Trade isn’t the only thing getting squeezed in the credit crunch linking the economic fortunes of the two North Atlantic islands. Iceland’s banks have invested some $250 million in Newfoundland’s fishery and as much as $750 million in the Atlantic Canadian fishery and processing industry as a whole. The banks’ uncertain future is the cause of anxiety in Atlantic Canada. Trevor Taylor, Newfoundland’s acting fisheries minister, said one concern will be the ability of the fish processing companies to access credit lines when they need to purchase fish from harvesters in the new year.
Just about every major Atlantic Canadian seafood processor holds lines of credit from the Icelandic banks, including Newfoundland’s Barry Group and Ocean Choice International Inc., and Nova Scotia’s High Liner Foods Inc. (TSX: HLF) and Clearwater Seafoods Income Fund (TSX: CLR.UN). High Liner has less than $15 million outstanding on a $40-million credit line from Landsbanki, but says that the bank’s failure won’t impact the company.
Clearwater, though, hasn’t escaped unscathed. The Halifax income fund’s bid to take itself private has been delayed because of Glitnir’s 10% stake in the deal that includes $190 million in debt financing. Clearwater CEO Colin MacDonald called the delay from Glitnir’s collapse “an inconvenience,” but added: “They weren’t critical to our existence by any stretch of the imagination.”
Some critics argue that the global credit crisis, with its ability to negatively effect financial dealings that are continents apart, is just one more manifestation of why businesses will return to regional economies of scale, at least in the short term. Nayan Chanda, editor of Yale University’s YaleGlobal Online magazine and author of Bound Together: How Traders, Preachers, Adventurers and Warriors Shaped Globalization, says energy prices are already prompting businesses to relocate supply chains regionally to cut back on transportation costs. With attractive credit terms suddenly vanished from the market, companies will also look closer to home for financing again.
But Chanda cautions that in the case of credit, regionalization will only last until the market regains its balance and loans begin to flow again. At that point, Chanda says, lenders will go after borrowers once more, and as more people return to the credit market, interest rates will once again drop.
Newfoundland’s Taylor says part of the blame for the credit mess spreading through Atlantic Canada’s seafood industry extends to the Canadian banks. He argues that, traditionally, the banks have viewed the fishing industry as a poor credit risk and have done little to support the companies. “There’s a reason why Canadian industries, and the fishing industry in particular, have gone to Iceland to secure financing, and it’s because the Canadian banking industry has not been very accommodating,” says Taylor.
Gary Hufbauer, senior fellow at the Peter G. Peterson Institute for International Economics in Washington, D.C., goes a step further: he faults the Bank of Canada for not watching more closely over the international lending practices Canadian companies engage in. Says Hufbauer: “I’m surprised the Canadian authorities didn’t see the exposure and weren’t more proactive in terms of looking at how these Icelandic banks were managed.”