How expensive is Icesave?
Olafur Margeirsson, PhD student in Economics at the University of Exeter, is a new Icelog guest writer. His research is in Foreign Direct Investment in financial services and its effects on financial stability. Earlier, he was a part-time analyst at Kaupthing Research. Olafur has written about the sustainability and weaknesses of the Icelandic pension system and has criticised the general indexation of mortgages.
During the Icesave debate the cost of Icesave has been a contentious issue. The Icelandic government has sought to minimise it, others have seen it as a real threat. Olafur’s log is an echo of that debate.
Now that Althingi has passed the newest version of the Icesave bill, “all that is left” is to get it through the parliament for the third round (all bills must be discussed, amended if needed and passed three times in Althingi), pop the cork and celebrate the disclosure of this nagging matter. The fact has not changed though that nobody knows how much this will cost the Icelandic already-neck-deep-in-debt taxpayer.
There are some ideas though. GAM Management, one of the few past-collapse established financial firms, was asked to estimate how much the cost of the Icesave agreement could be. Their results were shocking.*
They estimated the net cost somewhere between ISK26bn and 233bn. The base scenario (no change in the ISK exchange rate until 2017, return of failed Landsbanki’s assets according to the receivership committee’s estimate) approximated the net cost to be about ISK67bn. But if the ISK weakens by 2% per quarter, the cost would rise up to ISK155bn. Add that to 10% lower price of Landsbanki’s assets and the cost would spike up to ISK233bn.
The macroeconomic repercussions of this agreement would be quite frankly monstrous. ISK67bn may not sound too much but that is all the same equivalent to roughly 15% of the total income of the State in 2010. It took ages to squeeze a finance bill with ISK30bn cut in government spending through Althingi. The debt of the State was already 80% of GDP year end 2010. The gross cost of the Icesave is roughly 620bn. Passing the Icesave bill would mean that the ratio of government debt to GDP would spike up to about 120%. And all the risk of the agreement nests itself in the balance sheet of the Icelandic state.
Peculiarly enough, nobody has estimated the cost of taking this fight to the EU court.
*For those fluent in Icelandic, GAM Management’s Powerpoint show about their estimate is here.
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