March 2010
McDonald’s is pulling out of Iceland. The mid-Atlantic island’s economy has been badly hit by the “global credit crunch.” Big Macs no longer pull in profit there. Rising unemployment and a collapsing currency mean that tills have stopped ringing in capital Reykjavik’s Americanised fast food stores.
Eighteen months on from global credit crunch headlines first appearing in newspapers, we also report here on the wider geographical impacts of the worst global recession of the post-war era.
We ask: what happens when global flows slow down, or even go into reverse gear? And what led to the sudden "de-coupling" of so many global connections in the first place?
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The “de-McDonaldsisation” of Iceland
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Financial connectivity and the global credit crunch explained
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Geographical impacts of the credit crunch
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KS3 PowerPoint

Iceland, a small state of just over 300,000 people, recently discovered that its banking assets were grossly over-valued. During 2008, the mid-Atlantic island economy plunged into deep economic recession. Last autumn, McDonald's announced the closure of its three Iceland restaurants - a clear symptom of severe economic depression. How did things get so bad for Iceland?
The Financial Times (27 October 2009) notes that this closure of outlets by the famous transnational corporation (TNC) “will see Iceland, one of the world's wealthiest nations per capita until the collapse of its banking sector last year, join Albania, Armenia and Bosnia and Herzegovina in a small band of European countries without a McDonald's”.
Until now, McDonald's has been operated as a franchise in Iceland by two brothers named Gon and Magnus Ogmundsson. They blame the restaurant closure on two main factors that have been brought into sharp focus by the recent global economic downturn:
Firstly, the "unique operational complexity" of doing business in an island nation right on the edge of the Arctic Circle. Most ingredients have to be imported a long way from Germany.
Secondly, the collapse of Iceland’s currency, the krona, which has led to a doubling in production costs for burgers. The krona plummeted in value during the global credit crunch while the euro (used in Germany) strengthened relatively, making the purchase costs of ingredients even higher for McDonald's in Iceland.
To stay in profit and keep trading, the brothers say they would have needed to charge another 20 per cent on top of what are already high prices. That would push the price of a Big Mac above the $5.75 it costs in Switzerland (home to the world's most expensive McDonald's, according to the "Big Mac Index").
As CNN News (30 October 2009) put it, “three branches of the mighty McDonald's forest are lopped off by the tree surgeon of global finance.” Any Icelander desperate for a Big Mac will now need to take a long flight to the Irish capital Dublin to find the nearest McDonalds outlet - a mere 2,000 kilometres away!
Why was Iceland hit so badly by the credit crunch?
The loss of its golden arches highlights the extent of Iceland's economic demise since the pre-crisis boom years, "when its Viking raider entrepreneurs turned Reykjavik into an international finance centre and launched a buying spree of high-profile European assets." (Financial Times, 27 October 2009).
All three of Iceland’s major banks collapsed in 2008. Like financial service providers in the US and UK, Iceland’s banks lent enormous amounts of money in comparison to their actual monetary assets during the run-up to the credit crunch - while also re-bundling the debt owed to them as so-called insurance bonds.
The banks were first allowed to conduct business in this way after 2003, when Icelandic financial markets were deregulated. The move allowed banks to borrow money from other lenders overseas, triggering growth of a major financial bubble.

Iceland has since suffered a dramatic turnaround in its fortunes:
In 2007-08, Icelanders were still ranked as the sixth richest group of people in the world and number one in the HDI (Human Development Index). House prices had doubled since 2001 and international migrants were queuing up to gain entry.
But just 18 months later, Iceland’s banks have been nationalised and its economy is in a tailspin. The krona has halved in value.
25% of households face bankruptcy, burglaries have doubled, hospital wards face closure due to lack of funds and one-third of young people are considering emigration (Financial Times, 15 October 2009).
Iceland is now dependent on a $10 billion rescue aid package led by the International Monetary Fund. This may even be the trigger needed to make Iceland apply for European Union membership.
It was not just Iceland that was badly affected by the collapse of Landsbanki. Thousands of British savers had money invested there too. Alistair Darling, the UK Chancellor, pledged to make good all losses for British people at an estimated cost of £4.5 billion to the taxpayer. It also transpired that many UK local councils had money invested in Iceland – estimates suggest the figure may have been as high as £800 million (Kent Council alone lost £50 million in Council Tax savings).
Currently, it remains unclear whether Iceland's government will provide the UK Treasury with compensation or not. In a recent referendum the Icelandic population voted against repaying Britain (Observer, 07 March 2010).
De-McDonaldsisation
Critics of globalisation originally coined the phrase McDonaldsisation to characterise the way a homogenised cultural landscape began to appear around the world in the 20th century. Large Anglo-American TNCs like McDonald’s, Disney and Coca-Cola have displayed considerable expertise in designing and advertising aspirational products that have been successfully exported around the world.
Also describing the actions of such TNCs as a form of cultural imperialism, opponents of these firms claim that as cultural homogenisation has taken place, local cultures around the world have lost their different heterogeneous traits and have become worryingly similar.
Like biodiversity loss, threatened cultural diversity is a cause of concern for many observers. Indeed, Iceland’s own population was polarized by the arrival of McDonald's back in 1993. “The burger brand seemed to split communities into fundamentalists who regard it as either a sign of civilization or the evil ambassador of American imperialism” (CNN, 30 October 2009).
However, now that McDonald’s is a spent force in Iceland, we find that globalisation also has a ‘”reverse gear”. Once the golden arches have been dismantled, the Ogmundsson brothers plan to open a string of Icelandic burger bars under a completely new name. The new restaurants will take tap into the island’s own food heritage by using exclusively Icelandic food and ingredients. "People are pleased that we will be sourcing more goods locally," the Ogmundssons told CNN.
The new venture will still reflect aspects of cultural globalisation at play here – after all, the burger itself remains, in essence, an American cultural creation (very different from traditional Icelandic cuisine such as pickled herring, moss, minke whale, rotten shark or stewed seaweed). But there is a new opportunity here to introduce authentic Icelandic flavours into the new burger menu.
This "re-localisation" of production for fast food outlets in Iceland is an especially interesting geographical consequence of the global credit crunch. After three decades of uninterrupted globalisation led by powerful TNCs like McDonald's, it is a striking finding to see newly-emerging localised economic geographies coming to the fore once again in a highly advanced economy such as Iceland.
[Iceland is not the first country to have lost its 'golden arches' although the circumstances surrounding previous withdrawals have been very different. In 2002 McDonald’s withdrew from seven nations, including Bolivia, which had poor profit margins, in a cost cutting exercise. It continues to operate in 119 countries on six continents, (Guardian, 27 October 2009)]

Financial panic swept the planet in 2008. The interconnected and interdependent nature of the global economy created a crisis that spread instantly and extensively. World GDP fell for the first time since 1945s and globalisation was discovered to have a “reverse gear”. The Asian Development Bank estimates that as a result of the global credit crunch, financial assets worldwide shed more than $50 trillion in value during 2008 - a figure of the same order as total annual global economic output. What were the causes of the global credit crunch?
This was not the first post-war global economic disaster; precursors include the major OPEC oil crisis of the 1970s and, more recently, a whole string of economic ups and downs, such as the Asian financial crisis of 1998 and the “dot com” crash of 2001. However, the scale of the recent global “correction” was beyond the worst expectations of many critics.
World trade fell roughly twice as fast in 2008 as during the Great Depression on the 1930s. Several major financial institutions failed and an unprecedented collapse of global confidence occurred. Share prices tumbled across all stock exchanges and many national economies entered a period of economic recession from which some had still not emerged at the start of 2010.
The origin of ‘globalisation in reverse gear’

Many economists believe the colossal "bust" of 2008 – like the major "boom" that preceded it for many years – was an inevitable feature of free market economics and financial risk-taking. The full story of what happened is complex and encompasses: global imbalances in levels of wealth creation; changes in the regulation and operation of money markets; the growth of a very high-risk-based lending culture in the US and other developed nations; and the runaway aspirations of ordinary consumers living in these countries.
Key events leading up the global credit crunch were as follows:
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During the “noughties”, housing salespeople working on commission had been pushing up sales of sub-prime property mortgages in the US (they were offering big loans to low income buyers who were sometimes not asked to prove they had sufficient earnings to ever pay back the debt, therefore high-risk lending).
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In other countries, similar trends were followed; in the UK, lenders like Northern Rock adopted more relaxed lending, allowing people on ordinary incomes to sometimes borrow 125% of the value of their homes, with low interest rates attached. Some consumers found this was a cheap and easy way to borrow large sums of cash for high street or holiday spending.
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Banks worked out ways of turning the enormous mortgage debt owed to them by homeowners into bonds – a financial resource that could, in turn, be traded with other firms, sometimes in the form of an insurance deal. Some of the most well-known bonds were called Collateralised Debt Obligation (CDO). This effectively meant the sub-prime mortgages had been sold on to other banks and insurance companies across the world, so the debt chain was passed on.
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Trade in these bonds was so good that it fostered a widespread sense of financial security in the banking industry. Risk was perceived as being well-spread with so many different organisations involved (thanks to CDO bonds). This encouraged even greater levels of lending and fewer calls for people borrowing money to demonstrate any ability to pay it back. By 2007, Northern Rock was lending three times more money (per pound of its own assets) than in 2004.
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But defaults started to rise on US sub-prime mortgages as borrowers defaulted and homes were repossessed and sold at auction at far lower prices than their original value. As house prices fell this, in turn, led to re-valuing of products such as the CDO bonds. In a culture of fear, confidence fell further and this affected sales of products. Many banks found their assets were worth far less than they had thought – and faced sudden bankruptcy. The sub-prime mortgages that had been traded were not being repaid, and the chain of debt increased.
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In September 2008 the investment bank Lehman Brothers filed for bankruptcy. After its multi-billion dollar collapse, facts emerged showing the firm had lent 35 times more money than had ever been held in assets: it only owned $1 of every $35 “held” in its accounts.
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The evaporation of financial liquidity saw global trade enter freefall. Households and corporations postponed major spending decisions (such as buying a car), leaving producers with warehouses full of unsold goods and often unable to pay staff wages. This vicious circle – a negative multiplier effect – saw G7 economies shrinking at an annualised rate of 8.4% in the first quarter of 2009. Housing prices collapsed for related reasons, leaving some recent buyers with negative equity.
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Big firms that had engaged in excess leveraging (borrowing against future earnings) during the good times were also left facing an uncertain future (Manchester United is a good example of this).
Who is to blame?
Many commentators and much of the popular press feel culpability for such epic mismanagement of global capital lies with people working in the financial sector. Bankers in New York and London were all too ready to exploit the openness of the market and to get involved in speculation (Financial Times, 17 September 2009).
Other experts suggest that the unbalanced nature of recent global growth was a more important root factor. China and other exporting nations built up an enormous trade surplus after 2000, giving them a giant savings glut. Held in US dollars, the Chinese money surplus actually helped depressed borrowing costs for US and European banking customers. This financial connectivity – and in particular the nature of the global imbalance between high savings rates in emerging economies and bubble-fuelled spending in older economies – was a major factor leading to the credit crunch.
According to this view of events, world economic growth during the noughties was underpinned by surplus dollars from China’s runaway success in manufacturing sales constantly being recycled in the global financial system as fresh loans for US consumers. Writing in the Financial Times (06 October 2009), Krishna Guha described this as “the apparently perverse model in which poor but fast-growing countries finance current consumption in rich countries in return for claims on their future output”.

The events of 2008-09 can be seen as a crisis of globalisation, fostered and transmitted by the deep global integration of national economies that vary greatly in their individual nature and functioning. Many negative impacts have followed for people and places. During 2008-09, top firms failed, economies stagnated and many migrant workers headed home, both on an international and a local scale. But newspaper reports have identified “winners” too. These include some major emerging economies, notably China, as well as some resilient businesses (whose market share has grown now their competitors have gone bust).
1. Credit crunch “losers”
According to the International Monetary Fund (IMF), total support for the global financial system from the governments and central banks of the US, UK and Eurozone amounted to nine trillion dollars (around £6 trillion) by the end of 2008, four months after the crisis started. G7 nations agreed quickly to use “all available tools to support systematically important institutions and prevent their failure” (IMF transcripts, 11 October 2008). Thus the UK injected cash into Lloyds TSB and Royal Bank of Scotland, two of Britain’s largest TNCs (RBS is one of the five biggest banks in the world).
These banks were, essentially, deemed to be too financially connected to fail by UK politicians. The level of resulting debt left behind is simply astonishing. The UK has borrowed so much money that simply to pay the ongoing interest it accrues requires the government to continue borrowing a further £56 per person per week. Robert Wade, LSE professor of political economy, has commented critically that we now live in a world where “the financial sector privatises profits but socialises losses.”
Looking around the world, a number of nations and a great many people were particularly hard-hit:
Amongst the high-income nations, four were especially hard-hit, other than the UK and US. These were Spain (on account of an oversupply of unsold Mediterranean property), Iceland (whose banks invested heavily in poorly secured loans, resulting in a collapse of the Icelandic krona and purchasing power that has seen McDonald’s closing its stores there), Ireland (where unemployment trebled to reach 13%) and heavily indebted Greece (Guardian, 08 March 2010).
Parts of the oil-rich middle-east were badly affected. Half of UAE’s construction projects, totalling $580 billion, were cancelled or put on hold, after the real estate bubble burst on the back of speculative investing. The full extent of Dubai’s debt only emerged in late 2009. The emirate’s investment arm, Dubai World, is now known to have amounted $59 billion of debt it cannot repay (having built lavish developments like a giant island shaped like a palm tree).
Some of the world’s richest billionaires saw their fortunes slip away almost overnight. Of the 1,125 billionaires living in 2008, only 793 retained that status a year later and 87% saw the value of their assets decline. Lakshmi Mittal, the Indian steel titan, lost $26 billion of his fortune, Roman Abramovitch saw his wealth slip from $23 billion to $14 billion. Bill Gates saw his $40 billion estate halved in value (Times, 16 February 2009).
At the other end of the income scale, the World Bank estimates the crisis pushed 90 million of the world’s poorest people into extreme poverty (less than $1.25 per day) – meaning that the Millennium Development Goals (MDGs) have become harder to meet by the 2015 target date. 390 million Africans have seen their income drop by 20%. The poorest countries face a long recovery – trade, remittances, tourist revenues and investment have all fallen (Financial Times, 21 September 2009). The one beacon of hope for some African nations appears to have been Chinese foreign direct investment (FDI). For instance, South Africa suffered a loss of 50% iron ore trade from Europe and Japan during the last quarter of 2008. However, Chinese demand rose by 35%.
Severe impacts of the global credit crunch were also experienced in the manufacturing sector after a slowdown in consumer spending on items such as cars. Few manufacturing regions were left unaffected because transnational corporations have built up complex global networks of production. Patterns of out-sourcing built up over last thirty years - during what some people see as the “golden age” of globalisation – left the global economy highly vulnerable to any fall-off in demand. The de-coupling and dis-aggregation of some supply chains and business clusters in 2008-09 caused impacts to be especially severe in the worst-affected places, such as Detroit, where the housing market has reportedly collapsed in line with the city’s car industry crisis (Guardian, 02 March 2010).

2. Credit crunch “winners”
China has emerged from the crisis as the most significant winner in many people’s eyes. Now the world’s largest exporter, it sustained growth of 8% in 2009 while the US and UK remained in negative growth and recession. It is the world’s largest consumer of vehicles, surpassing even the US for sales. While Detroit’s General Motors was staving off bankruptcy in the US, its China operations set record sales. In the first quarter of 2009, China became the biggest car market in the world, with April sales up 50% on 2008. Meanwhile, GM slashed its US workforce by 38%, a loss of 23,000 jobs.
China’s success comes at the expense of older superpower the US. The global monetary system is currently pegged to the US dollar. This has been a key factor in securing worldwide American economic and cultural hegemony since the 1970s. But as a result of the credit crunch, some International Monetary Fund (IMF) economists have begun to voice the opinion that, in future, the dollar should share this important role with the Euro and, perhaps, China’s remibini. (The origins of the credit crunch lie in the American heart of the global financial system; and it has become apparent that tying all worldwide monetary flows to the value of a single national currency - the dollar - brings dangerous global risks).
At a smaller scale, local winners have also appeared on the high streets of advanced and emerging economies. Some chains have befitted enormously, such as UK media provider HMV, after rivals such as Woolworth collapsed. While expensive restaurants may have suffered a drop-off in sales, cheaper fast food providers have often done well. KFC and Subway opened hundreds of new UK stores in early 2009, creating over 10,000 new jobs. The UK retailing landscape may have experienced an “extinction event” due to the global credit crunch – but it has certainly not stopped evolving!
Social and environmental impacts of the credit crunch
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Migration flows International migration flows sometimes reversed direction. Almost half of the UK’s eastern European migrants returned home, leaving just 700,000 still resident in Great Britain. Internal migration trends were sometimes affected too: notably, 20 million Chinese workers lost their work in urban export processing zones and returned home to the countryside. 9,000 of the 45,000 export factories in the Pearl River delta (Dongguan, Shenzhen, Guangzhou) closed their doors, causing massive temporary job losses.
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Tourism flows International tourism slowed down. Visitor numbers to Thailand fell by 20%. Many other countries recorded a fall-off in tourist numbers. In contrast, internal tourist flows often rose as people opted to take a ‘staycation’ rather than a foreign vacation. In the UK, many more people stayed at home and took holidays locally in Scotland or Cornwall instead of heading overseas.
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Greenhouse gas emissions The Financial Times headline (21 September 2009) says it all: “Plunging output cuts CO2 emissions”. Emissions fell in 2009 by around 3% - further than at any other time of economic hardship in the last 40 years. Falling decline for goods meant less plants operating and fewer new power stations being built. The credit crunch achieved something no politician would ever call for, albeit temporarily – lower levels of consumptions of goods and services! However, the effect (which may in any case have been over-stated
KS3 Powerpoint on this topic (PPT)
Written by Dr Simon Oakes, Chief Examiner for IB Diploma Programme geography and teacher at Bancroft’s School, Essex.