It's the Web 2.0 trend that just won't go away - the use of country-code top level domains for websites that simply aren't relevant to the geographic area they indicate.
A new video from Google's head of search spam Matt Cutts addresses the issue (see below); quite timely as it were with the coming introduction of all those generic top level domains.
Cutts indicated that when it comes to country-level domains (including .IO, .IM and .LY) Google is going to assume that the content on the site applies to the geo-targeted area specified by the domain. If it fails to do that, the site is doing a "disservice" to the domain, and will likely suffer (in terms of exposure) as a result.
“If you go and pick a really weird novelty domain that nobody else really uses, and mostly is used by this other country, we’re still probably going to assume it’s most relevant to that particular country,” says Cutts.
Google actually expanded the list of ccTLD's that they recognize as genric, and encourages website owners to specify the targe country for those domains in Google Webmaster Tools.