Sigrún Davíðsdóttir's Icelog

Search Results

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.

Follow me on Twitter for running updates.

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

with 5 comments

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.

Follow me on Twitter for running updates.

Written by Sigrún Davídsdóttir

November 23rd, 2011 at 12:41 pm

Posted in Iceland