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Ireland and Iceland – better to let fail or to bail out?

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When it comes to bailing out banks Ireland and Iceland chose different paths. Interestingly, there are those who see the two countries as a test of whether it is better to let the bank system fail – or bail it out. That is at least how Jim Leaviss, head of retail fixed interest at M&G Investments is quoted as saying in an article on Ireland in the FT (subscription needed). “Iceland and Ireland were a test of whether it was better to let your bank system collapse or bail it out. So far it is not clear which was best. Irish bond yields have fallen a lot but that was skewed by the ECB’s actions.”

On the basic indicators, growth and unemployment Iceland, is doing much better.

Unemployment: Iceland: 4.5% – Ireland: 15.1%

Growth 2011/2012 (forecast): Iceland: 2.6% / 2.5% – Ireland 0.7% /  0.9%

The Irish ray of light these last days is the notch up by Fitch: from negative to stable (for those who still take any notice of the big rating firms), at BBB+.

As I’ve pointed out earlier it is however a myth that Iceland didn’t bail out its banks. It did bail out some smaller financial institutions to quite a cost but it didn’t bail out its three big banks – Kaupthing, Glitnir and Landsbanki – in October 2008. From early 2008, the Government (a coalition of the Independence Party, conservative and the social democrats, who now lead the Government) and the Central Bank did try to get loans from all and sundry to prepare for this eventuality – it did get a credit swap from the Scandinavian central banks of €1.5bn – but not enough to save the banks. The reality was that the banks couldn’t be saved.

The Icelandic Government has posted what amounts to 20-25% of GDP in bailing out – or trying to bail out – various other financial institutions and one insurance company. Some of this might be recovered later on but some of it is already lost. It is therefor not correct to say there were no bailouts in Iceland and therefore Iceland is not a crystal clear case of no bailouts vs bailouts.

As I have also pointed out earlier, the recovery in Iceland can partly be attributed to wide-reaching write-downs, both for companies and individuals and for changes in the bankruptcy law. All of this helps but it is over-simplification to say that there is any one policy that has made all the difference.

Ireland and Iceland have been very much in my mind for the last two days. I’ve been immersed in all things Irish, attending a conference at Goldsmiths University on the Future State of Ireland, brilliantly organized by Derval Tubridy senior lecturer in English Literature and Visual Culture at Goldsmiths. With illuminating lecturers like columnist and adviser to the EU on corruption Elaine Byrne, Roy Foster professor of Irish History at Oxford, Luke Gibbons professor of Irish Literary and Cultural Studies at National University of Ireland and journalist and writer Fintan O’Toole, this was bound to be an interesting event.

When I first saw the programme for the conference (which Elaine drew my attention to; thanks Elaine) and saw there were some artists involved my first thought was that this was most likely going to be a pretty fluffy event. It turned out to be the contrary – a very dense event with a fascinating insight into Irish History, culture and the Irish psyche.

The artist duo (Gareth) Kennedy (Sarah) Browne showed a video of ‘How Capital Moves’ – taking inspiration from an American company moving from Ireland to Poland. The story of this move is told from several aspects by creating several characters, all lovingly portrayed by one Polish actor. It’s funny and witty but also sadly true, based on words from people working for this company.

The photographer Anthony Haughey has been photographing the Irish and their surroundings for over 20 years, immigrants in this country of emigrants, as well as looking at parallel stories in other nations. His light is the living light caught by long exposures during the night. This profound realism – real as it gets – turns into strangely surreal scenes. The almost disturbingly beautiful photos reveal tension and troubled lives – portraying at the same time striking, still images and strong stories.

Foster’s stories of Irish radicals in the early 20th century seemed to indicate that something is lost in modern Ireland. Where is the radicalism now? Yet, listening to O’Toole and Byrne there doesn’t seem to be any lack of radical thought among journalists and columnists – and interestingly, Jim Clarke at Trinity College pointed out that the tabloids, though conservative in many ways, have been better at portraying people’s anger and disgust, than others.

There is one thing that Ireland has and not Iceland: a strong diaspora. That enriches the debate since it is easier being an outsider looking inside. Ireland is a small country where people speak carefully because everything and everybody is connected. A journalist who in the 1970s spoke of politicians taking bribes, proven right 40 years later, was at the time ostracized and forced to emigrate.

“Shame” and “blame” were two words that ran through the debate. For foreigners it’s easy to forget the other great power in Ireland, next to the state – the Catholic Church. The Irish have not only been thrown into economic turmoil, seeing the political class fail – but also seen grotesque moral failure and criminal child-abuse exposed in the church. Interesting times for the Irish – as was so strongly born out at the conference.

What the Irish still lack is a comprehensive overview of the collapse of their banks. To my mind, the Irish still have only a sporadic evidence of how they have been governed this last fateful decade before their main banks collapsed. The feeling in Ireland is that they do know it all. Before the SIC report was published in April 2010, Icelanders thought the same. The report showed that things had been much worse than even the most pessimistic thought: a complete failure of politicians, regulators, the Central Bank, the business “elite” – and of course the private banks, where bank managers are now being charged by the Special Prosecutor and sued by the three banks’ Winding-up boards. – In terms of legal action against bankers there is peculiarly little happening in Ireland.

It’s difficult to say which of the two countries will fare better. I still believe it’s been wrong for European governments to save failed banks. In Iceland, it was a relatively easy decision to take – there was no alternative regarding to the three big banks. The fact that the creditors were foreign financial institutions – mainly German banks – made it easier, both politically and financially.

Interestingly, it was the same with the Irish banks. Also there, the creditors were mainly foreign and yes, mainly German. But the sums in Ireland were much bigger – and the European Central Bank and the Germans weren’t happy to see banks fail in the euro zone: the ECB because of principles and euro pride; the Germans because German banks were at risk. The Germans are rather sanctimonious about their banks – after all, they are still standing. But the story is that German banks were prudent at home but wrecked havoc abroad – the German banks have been like teenagers who are model kids at home but cut up the furniture and paintings on the walls when they go partying out of their parents’ sight.

As has later become evident, the troika treatment of Ireland in November 2010 set the example of private bank debt migrating to the state, turning the state into an unsustainable borrower – as has now happened in Greece, Portugal and Cyprus, with Spain fiercely resisting to pick up that lethal same burden.

For every imprudent borrower there is a risk-blind lender. With the one-notch up on the Irish rating scale some will hope that the example made of Ireland will turn out to be the good example. There are voices in Ireland saying it is just not fair for the state – and the taxpayers – to be paying the privately accrued debt. It is painful to see the Irish struggling with the debt, which was so recklessly showered over them.

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Written by Sigrún Davídsdóttir

November 19th, 2012 at 12:48 am

Posted in Iceland

A tale of two countries

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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

An ESA investigation into loans to VBS, Saga Capital and Askar Capital

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The last log, ia on the state loans to VBS and Saga Capital was timely. The EFTA Surveillance Authority has just announced that it will open an inquiry into these loans, as well as into loans to Askar Capital.

Here is what ESA announces:

The EFTA Surveillance Authority decided today to open a formal state aid investigation into loans granted to the investment banks Saga, VBS and Askar Capital.

The loans, of a total amount of 52 billion ISK (330 million EUR), were granted on favourable terms by the Icelandic Treasury in March 2009. The Authority received a complaint concerning the loans from an interested party in July 2010.

The purpose of the loans was to reschedule short-term collateral and securities loans from the Central Bank of Iceland to long-term loans. This was thought necessary because the Central Bank loans were in default.

The Central Bank collateral loans were secured amongst others with bonds issued by the three commercial banks, Glitnir, Kaupthing and Landsbanki Islands. Following the collapse of those banks in October 2008, the value of the underlying security diminished severely. The investment banks were unable to provide other security or settle the debt.

The Icelandic authorities claim that through the loan conversion, they have endeavoured to protect the interest of the state and acted in line with the conduct of a private creditor. The Authority, however, has doubts whether the terms agreed by the Treasury are consistent with commercial conditions. If  not, the loan conversion could be regarded as unlawful state aid within the meaning of the EEA rules.

VBS Investment Bank and Askar Capital Investment Bank are already in liquidation and the operating license of Saga Investment Bank has recently been revoked. The Authority nevertheless considers it appropriate to finalise its assessment of whether or not the terms of the loans are compatible with the state aid provisions of the EEA Agreement.

Should the Authority conclude that the loan conversions are to be regarded as unlawful state aid, it would be obliged to require the national authorities to recover the aid from the recipients. If the recipient of such aid is in liquidation, claims shall, if possible, be filed against the estate for recovery of incompatible aid.

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Written by Sigrún Davídsdóttir

November 23rd, 2011 at 12:41 pm

Posted in Iceland