Sigrún Davíðsdóttir's Icelog

A tale of two countries

with 6 comments

Tonight, the main news on the Bloomberg‘s webpage is on the new Greek deal. Beneath it there is a Bloomsberg article from earlier today that has shot to the top in the course of the day. If the Greeks read the article on Iceland there would be a massive uprising in Greece because of the new deal: the Icelandic lesson, according to Bloomberg, is that public anger does pay.

Given the circumstances, it’s difficult to imagine what could possibly improve the life of the Greeks – their situation differs from Iceland. But the new EU deal on Greek won’t do wonders for Greece. It will help private sector creditors of Greece, though there is an attempt to force them to write down their debt. Ordinary Greeks will all the same be paying with blood, sweat and tears for years to come in a country where harsh economic measures stifle growth, leaving the Greeks with absolutely no means to grow out of this misery. It remains to be seen how history will judge those Greek politicians who are signing the deal tonight.

The Bloomberg headline on Iceland is “Icelandic Anger Brings Record Debt Relief in Best Crisis Recovery Story.” There are two things of interest here – debt relief and crisis recovery.

As professor Thorolfur Matthiasson explains to Bloomberg, the measures the Icelandic Government has used to help indebted households have worked. “Without the relief, homeowners would have buckled under the weight of their loans after the ratio of debt to incomes surged to 240 percent in 2008, Matthiasson said.” The Government and the banks agreed to forgive debt exceeding 110% of home values. A recent ruling regarding a forex loan indicates a further bonus to those who took out forex loans but the end of that saga, and if it will lead to further debt relief for those who took out indexed loans, is still unclear. The 110% way is, according to professor Matthiasson, “the broadest agreement that’s been undertaken.”

Greeks aren’t fighting forex loans and high private debt but horrific public debt and consequent cuts to the bone. The Icelandic Government did have to make deep cuts but nothing compared to what Greece is facing. Those who want to study the Icelandic recovery find a wealth of information on the IMF website, from a conference held in Iceland last October, as reported earlier on Icelog.

Bloomberg points out that Iceland’s $13 billion economy shrank 6.7% in 2009, but grew 2.9% last year. According to an OECD forecast it will expand 2.4 percent this year and next. In comparison the euro area will grow 0.2% this year. In contrast, Greek GDP has been decreasing for 6-7% a year for the last two years. The forecast for this year, according to the statistics in the new deal, is a decrease of 4.3% – most likely too optimistic – followed by a 0% growth in 2013 and – probably overly optimistic – a growth of 2.3% in 2014.

A significant difference between Icelandic and Greek fortune is that Greece is being forced to fork out money it doesn’t have – but has to borrow – to pay its creditors. Banks with cheap money that didn’t bother to do the math and figure out that Greece should never have been lent all the money it got. For every unwise borrower there is a really dumb lender.

During 2008 the Icelandic Government tried to borrow money abroad to bail out its banks but couldn’t secure the necessary loans. Luckily for Iceland, events in early October 2008 overwhelmed the Government and the IMF – no one could figure out a way to bail out the banks (one Icelog source pointed out that a ECB repo could have been set up but there wasn’t the time). According to my sources, IMF employees present in Iceland as it all happened were furious that the Icelandic Government let the bank collapse but it was all too late and no way to figure out a way when it was all happening.

Instead of the immediate impossibility of saving the banks they were split up: domestic accounts were put into operating domestic banks – and further secured by making domestic deposits a priority claim – whereas the foreign operations were left to go bankrupt, leaving international creditors with whatever can be sold and turned into cash. In addition, the Icelandic Central Banks imposed capital controls to stop a capital flight from the country. This is, in short, the Icelandic way to prevent a banking disaster from turning into a national catastrophe.

This isn’t necessarily a panacea for all sovereigns who hit the rocks – but it’s well worth considering whether saving all banks and let private debt migrate to the public sector, as if it were a natural law to privatise gains and nationalise losses, really is the only way. Iceland couldn’t find any other way at the time (but did indeed later throw good public money at bad private banks; another story mentioned here).

Sadly for the Greeks, it doesn’t seem that any amount of public anger of the Greek demos can diminish this dreadful pain and sad future. Iceland got a quick stab. Today, Greece has been condemned to a lingering pain.

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Written by Sigrún Davídsdóttir

February 21st, 2012 at 5:43 am

Posted in Iceland

6 Responses to 'A tale of two countries'

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  1. Greece’s issue is the her growing lack of competitiveness within the fiscal constraints of the Euro. No devaluation and…so austerity. Private creditors do take a bath to the tune of 70%….so debt relief. Enough? No, the Geek state is still failing to balance tax collection against expenditure. problems…8 years of austerity, probable departure from the Euro, social cohesion out the window.

    Iceland, private creditors take a bath…ending up owning reasonably worthless Icelandic banks. ISK devalues. Debt relief across the countr…efffectively. Problems? Inability to access foreign capital, debt overhang from overseas ISK, same quality management / leadership that got Iceland into the mess to start with.

    andrew Jackson

    21 Feb 12 at 10:02 am

  2. Thanks for adding further to the description. Funnily enough, Landsvirkjun (the state owned energy company) was able to find foreign funding last year. Maybe a sign of the markets’ short memory. For the time being, Iceland isn’t seeking foreign funds but (ab)using the pension funds.

  3. Sigrún,
    In a world not fallen into the hands of a Simon Legree (melodrama vilain) style financial elite your notation “For every unwise borrower there is a really dumb lender.” would be appropriate.

    Unfortunately, today the “dumb” lending, with power to manipulate behind it, is considered, by the elite who believe themselves able to pull it off, to be “good business”.

    The pre-Greece parallel to the Greek debt-enslavement trick the powers of what appears to be intended to become the Soviet European Union, is here:
    and here:

    Iceland managed to dodge its intended enslavement through two maneuvers, first, the nationalization of the banks Britain collapsed after milking, to drop them into certain debt (the portions within Iceland’s control, which were those within her own borders), which sheared the portions Iceland needed away, and the rejection by Referendum of sovereign responsibility for the foreign portions’ commercial enterprise debt (in republics the people are the sovereign(s), each one individually and all when they make a majority decision [this is why the ESA’s Application lawsuit can’t win — the ESA is asking the EFTA Court to order the government of Iceland, servant to the sovereign people, to overthrow their soverign, which order would make the EFTA Court Judges revolutionaries]). Note that it was the old government that did the nationalizing, so Iceland being saved from being fiscally enslaved is not a partisan political situation.

    And of course the IMF was upset. Iceland slid out from under the bar of the trap while Britain’s invocation of its terror legislation froze the trap’s action…

    It is all really very amusing. But serious, since the financial interests are attempting to gain controls in nations, so they may have taxing authority, which will make them the government, or put them in control of the government. If they succeed Europe will be back to the feudal system, except with financial instead of hereditary kings and barons.


    26 Feb 12 at 1:48 am

  4. Foreigner Dogh flails: “If they succeed Europe will be back to the feudal system, except with financial instead of hereditary kings and barons.”

    Do not be alarmed, Foreigner Dough!!
    Delusional rambling is a minor side effect of the Rabies Vaccine.
    You should be back to normal in 6-8 weeks.



    7 Mar 12 at 11:12 pm

  5. […] the core of Iceland’s best crisis recovery is debt relief. It certainly is true that the recession-hit euro countries need a growth plan – […]

  6. […] of mortgages, the measures chosen were the so-called “110% way,” explained in this article, where the Icelandic situation is compared with the situation in Greece and Iceland. In November […]

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