The Icelandic lesson

[luzribeiro.livejournal.com]

When we say "crisis", everyone is talking about Greece, Italy, Portugal, Ireland... But no one mentions Iceland any more. Well, last week Iceland announced its new economic program. The plan aims to put the country back on the path of growth, relying mostly on the excellent quality of its people (well educated, well qualified), the good legislative framework (transparency in governance, working laws), and some effort to improve the efficiency of production, which would eventually lead to resurrecting the good investment climate that existed before.

Let's remember that just 3 years ago the country sank like Titanic. Now the new plan looks both ambitious and realistic. It's devoid of loud fanfares and fireworks, and yet it contains some very achievable guidelines that can make it work. That shows how calm and sober the Icelanders can be when assessing their situation, and their ability to come up with solutions to their problems.

Let's look back at how the Icelandic crash happened, and maybe we'll see what's causing this quick recovery. In 2008 Iceland declared bankruptcy. The debt of the Icelandic banks was exceeding 6 times the country's GDP, and when the global credit markets suddenly drained, Iceland was no longer able to pay its debts. Eventually the major banks declared bankruptcy and hang with a total of $85 million.

But instead of financing its sinking banks with taxpayer's money, Iceland allowed its banks to go bankrupt. Iceland only gave internal loans to the new banks, and didn't transfer foreign assets and liabilities. It just froze any movement on them. It did that because the Icelandic citizens overwhelmingly voted on a referendum, refusing to pay someone else's debts.

This of course angered Britain and Holland because they had invested a lot in risky assets in the old Icelandic banks, and now they were being showed the middle finger. Britain and Holland exerted enormous pressure on Iceland to bail out the bankrupt banks and repay them their credits ($6 billion), because otherwise thousands of British and Dutch investors would lose their savings. Those investors had been lured by the Icelandic banks because they had offered temptingly high interest rates, and it was all fun and roses for a time. They even used to call Iceland the Northern Tiger. But when the banks defaulted, Iceland was unable and unwilling to cover the losses. Britain and Holland have filed a lawsuit at the European court of free trade.

Despite all that, now Iceland is experiencing a fast recovery. First, as expected, the budget deficit for 2011 has dropped below 3%, and in 2013 a budget surplus is expected. Iceland's default didn't lead to a catastrophe as some had feared. As IMF itself is saying, "A large part of the unwanted effects did not become reality". The country's economic indexes are noticeably stronger than the countries who have received rescue packages. The Icelandic economy is shrinking by just 0.75% per year (2008-2012), compared to the Irish economy that's shrinking at a 2% annual rate, and Greece with much more. In Iceland, official unemployment is 5.8%, compared to Ireland 14%, Portugal 12.4%, etc. Surely, the real unemployment should be higher, but still you can see the difference.

But it's too easy to jump to the conclusion that some economists are hastily making, that Greece and Ireland should've been let to default. Joseph Stiglitz says that "Iceland did the right thing by making sure its payment systems continued to function while creditors, not the taxpayers, shouldered the losses of banks". On the other hand, he argues, Ireland did everything the wrong way. It is probably the worst model possible. Krugman also spoke positively of Iceland. He said at the NYT that he approves Iceland's default, and the country is doing much better than those who followed the "rescue package" model.

It's true that for the ordinary Icelanders this would hardly bring any short-term benefits. The collapse of the Icelandic krona means that all imported goods will be extremely expensive. The Icelanders who had taken loans in foreign currency will see the interest rates on their mortgages and credits jumping 2-3 times because of the fluctuations of the krona. The savings of the Icelanders have shrunk by 1/5 since 2009. And of course people are angry. Two thousand Icelanders gathered in front of parliament (Althing) throwing eggs at the ministers. The prime-minister slipped on an egg and fell on the ground. Hilarious but very telling, even symbolic. Europe is still looking at Iceland with distrust, and maybe a little fear.

What do I mean with this? Well, Iceland is unique for two reasons. First, it's very small. It's tiny, the population is just 330 thousand people. Also, unlike Ireland, Greece and Portugal, Iceland has its own currency. It can devalue its currency, which the other countries in the Euro zone cannot do.

The Icelandic minister of finance Steyngrimur Sigfusson said that people should be careful when they're talking of comparisons between Iceland on one side, and Greece, Portugal, Spain and Ireland on the other. Iceland didn't have a chance to save its banks. Attempting to use this model in other cases could be unsuccessful.

So what's the future for Iceland? There are people who want to see Iceland in the Euro zone. The Organization for Economic Cooperation and Development recently stated that Iceland would've had a much easier stroll through the financial crisis if it had been part of the Euro zone. Looking at Greece, I very much doubt it. But still, a few months ago the chairman of the Icelandic central bank announced that Iceland is still interested in joining the Euro zone, despite the current problems on the continent.

Others believe the future for Iceland is again bright. And I can't blame them. Given the super-high quality of their education, amazing health-care, a working social system and the inherent proneness of Icelanders to gather themselves in the hardest moments and work their asses out to get out of any dire predicaments against all odds, and having in mind the relatively huge natural resources and the excellent infrastructure in the country, I have no doubts that Iceland will be an "investment utopia" for many, once more. But this time they'll have to take the lesson and not repeat the same mistakes again. And, although most people are prone to repeating their mistakes, in Iceland's case, I'm somewhat more optimistic than, say, Greece.

In many ways, Iceland could serve as an example. And maybe that's why Iceland is stubbornly being kept out of the mainstream news.

Comments

[ddstory.livejournal.com]

I doubt anyone would trust us that much any more, at least not our banking sector. I wouldn't, either.

Now as for the industry, sure. There's always been great potential on our tiny rock, and investors cannot afford to ignore that. Besides, finance has always been a cloud of dust in the eyes anyway.

[mahnmut.livejournal.com]

Iceland is an example of a direct democracy in the working. Despite all the gloomy expectations, the crisis prompted the Icelandic people to restore their sovereign rights through direct participation in the political process. They practically forced their leaders to heed them. Lots of protests, but focused protests, and with a very clear and specific message, which resulted in two referenda, and eventually a new Constitution. But all this required a lot of effort.

It's no surprise that we're not hearing about this in the news any more. A quiet revolution has been going on there, you may call it the revolution of the tins because of all the cutlery they used in the protests. ;-)

Basically, the Icelandic people have refused to pay for the mistakes of a bunch of financial monopolists. Sure, some would now say "But where were those protesters when things were going smoothly and the sun was shining oh so brightly above this blessed island?" Good point! But I'd counter with the point that people are people, they get carried away and buy into the pinky talks about a bright future, especially when those come from reputed financists and from their own leaders, who they've learned to trust because their culture is designed like that. So when they get tricked in such a way and the shit finally hits the fan, that's where the people should take things in their hands and tell their leaders that No, We Are Not Going To Pay For Your Mistakes, Period.

The voice of the Icelanders was more than clear. On the 2010 referendum, 93% voted against selling off their country to the IMF. The response from the IMF was swift and expected - it froze all loans for Iceland, believing that it would twist the arms of the Icelanders. But the revolution (which remained un-televized anywhere around the world) had already begun, and it didn't slow down. There was already no way back. They decided to drink the full glasss.

It was like a soul-cleansing. With the support of a very angry, but very focused society, the politicians were finally able to look at themselves and have an honest and open debate about the future of the country, forgetting their political divisions for a while. They investigated all the crooks who were responsible for the financial crisis. Interpol issued an international warrant for arresting the former Kaupthing president Sigurdur Einarsson, while the other guilty bankers fled the country. It wasn't a witch-hunt. It was justice, one that most other societies have been unable and unwilling to grant to their people. And thus, others are postponing the issue for a later time, while Iceland is truly addressing it, head-on. All admirations for that!

[mahnmut.livejournal.com]

...
But no, that was only the beginning. The Icelandic people decided to forge a new Constitution, one that would free their country from its dependence on the extensive power of international finance, and virtual money. (The former constitution was outdated, written in 1918, and the only difference from the old Danish constitution was the word "president" substituting "king" in it).

Jared Diamond has described the agricultural collapse in Iceland from 9 C., back then the country recovered from the crisis in a way that was diametrically opposite to what's generally considered "inevitable measures", as the IMF itself is admitting and its new chairman Christine Lagarde has confirmed. The Greeks were told that privatizing their public sector is the only solution. Sure, but the public sector is a juggernaut there, so it's true that a comparison with Iceland is inappropriate. The Italians, the Spanish and Portuguese are being threatened by the Greek scenario. Iceland? Not really.

But people have to notice what's going on in Iceland. It's remarkable in many ways. The Icelandic people have refused to submit to foreign interest, and this tiny country has stated loud and clear that its people are truly independent. Just as John Perkins had once advised them (http://talk-politics.livejournal.com/409250.html).

Sure, Russia is trying to step in and fill the vacuum. Iceland has to resist the temptation to change one master for another. They have to stay firm in that respect. And that's their next challenge. So good luck, Iceland! You've shown that you can do it, no matter how painful the price.

[luzribeiro.livejournal.com]

Great insight! I'm a bit sad that I hit Send as it turns out at a time when most of our Icelandic members are away... Would be nice if they could weigh in, but I guess we'll have to wait for the end of the weekend. :/

[nairiporter.livejournal.com]

I wouldn't call it a "quiet" revolution. :-)

[gunslnger.livejournal.com]

Iceland is an example of a direct democracy in the working.

Which is only doable because there's so few people.

[harry-beast.livejournal.com]

Kudos to Iceland for resisting bad advice from Britain and the Netherlands! Compared to the Greek approach, it seems to be working out better. I hope that their efforts at improving governance will allow them to avoid similar pitfalls in the future.
However, joining the Euro zone seems like an awful idea. I am surprised that this is being seriously considered by important officials. Is there any chance that they might look to closer ties with North America or other parts of the world to reduce dependency on Europe, given the recent malaise on the continent?
The only disappointment here is the incident with the eggs. It's a waste of food and a health and safety hazard.

[luzribeiro.livejournal.com]

Is there any chance that they might look to closer ties with North America or other parts of the world to reduce dependency on Europe

Yes, but you may not like their new friend (http://news.bbc.co.uk/2/hi/business/7720614.stm).

[htpcl.livejournal.com]

I'm afraid there is not free lunch. The Icelanders will have to pay the price, however steep it is, and in whatever form they have to. Greece, too.

Offtopic, visiting Iceland has been one of my lifetime dreams. I believe I'll do it one day.

[paedraggaidin.livejournal.com]

Ditto, and ditto.

[luvdovz.livejournal.com]

Krugman also spoke positively of Iceland. He said at the NYT that he approves Iceland's default, and the country is doing much better than those who followed the "rescue package" model.

Oh no he din'n!

Don't worry about us. We'll be fine. Tough bastards we are. And no, I wouldn't recommend the Icelandic "lesson" to bigger countries. Small countries have smaller problems, and they can get out of them faster and in a simpler way.

[nairiporter.livejournal.com]

Given the super-high quality of their education, amazing health-care, a working social system and the inherent proneness of Icelanders to gather themselves in the hardest moments and work their asses out to get out of any dire predicaments against all odds

Judging from the representative sample that we have here, I would say Icelanders are one very tough bunch.

[abomvubuso.livejournal.com]

Just to add some nuance about the factors that accelerated the financial collapse in Iceland. Last year a detailed report (http://www.thefreelibrary.com/WSJ+says+loan+dispersal+of+Deutsche+Bank+and+Citigroup+increased...-a0223926497) by the parliamentary committee concluded that one of the main reasons had been the disproportionately huge credits (huge for the size of the Icelandic finance system anyway), that were given by a number of foreign banks (Citigroup, Deutsche Bank and others), to the Icelandic tycoons. Those credits were aimed at funding a number of acquisitions through risky bets that eventually turned the country into a heap of trash financially. The report also states that these same tycoons are now flocking back into the Icelandic bank system, and pumping up the successor banks which took the place of the ones where they had had a significant shareholding participation.

In some of the cases these tycoons had even used their own shares to back up the credits they were taking. It's exactly this that put additional fuel in the fire and ultimately accelerated the collapse of these banks and deepened the crisis by inflating the bubble exponentially. The report (which btw is over 2000 pages in its entirety) emphasises that the fault of the foreign banks is in that they funnelled their funds through risky loans at the Icelandic banks, practically using them as a laundry, or a launching pad to pump up their assets beyond reasonable levels, hoping to make enormous and quick profits, then to withdraw after they've turned their virtual money into real assets. And of course the local tycoons didn't mind being part of the scheme, because they got fabulously wealthy in the process. But the crisis hit too early and unexpectedly, and they were fucked, along with everybody else - shareholders, taxpayers, everyone.

Among the big players that are being frequently mentioned are Citigroup Inc and Deutsche Bank AG. And among the domestic tycoons, Kaupþing of course.

As for Greece, their case might've been slightly different (http://talk-politics.livejournal.com/449338.html), but again the involvement of some foreign financial juggernauts is not to be overlooked, namely Goldman Sachs. Food for thought.

[luzribeiro.livejournal.com]

It makes sense to assume that those tycoons were hoping that they would twist the arms of the Icelandic government and force it to use taxpayers' money to bail them out and help them start anew. But they were in for some nasty surprise.

[peamasii.livejournal.com]

The big players like Citi, GSCO, DEUT, probably figured out long ago that if they're going to conduct high-risk high-reward experiments, they will do it in small peripheral countries where the bust can be materialized in a few bankruptcies and a few politicians losing their career, after which the cycle can be initiated again. In Iceland it's not that surprising but in Greece I'm still wondering how the EU regulations allowed over-lending and over-leveraging by the likes of GSCO.

[allhatnocattle.livejournal.com]

I had a conversation here recently with somebody (I forget who) who explained to me the importance of energy in the world trade.

Wealth is built upon what one can acquire goods/sevices. And poverty is the exact opposite; an inability to acquire goods/services. (I'm not saying anything but the obvious so far).

It was explained to me that excess energy has lead to a period of economic growth and now that peak oil has passed it will lead to global economic recession.

One of the leading factors that saw the transition of international power in history is energy. The OPEC nations, Canada, Venezuela, etc have seen great wealth from their oil energy exports. Japan had attacked Peal Harbour in part to secure the energy to meet their needs. The UK had so much invested in the production and export of coal that when the practical engineering shift went towards oil (even nuclear) the UK was unable to manage. Heck, even the demise of wood on Easter Island was an energy crisis.

Other countries like USA, Belgium, Switzerland have done remarkably well trading in economics. They make not only make loans (to profit off interest), but they spur investment, and anything else creative with money.

Getting back to Iceland (remember Iceland?) I fail to see any mention in the OP or in any of the replies to it about Iceland's energy supplies. I understand that Iceland is about as energy independent as a country can be. A remarkable 81% of Iceland's energy is from domestically produced renewable resources. Threatening to cut off oil exports to Iceland isn't that much of a threat.

Threatening to make Iceland the Cuba of the north isn't much of a threat either. Cuba, despite lacking trade with USA, does rather well.

Iceland has been (and is in) the unique position to shrug off the consequences of their debts because of energy independence. Most warnings were seen as hollow as their threats were empty.

Greece may be in a similar situation. Greece's energy imports reached a record low in 1989, and is set the be even lower almost immediately. Unlike Iceland, Greece hasn't turned to renewable energy in a way anywhere close to energy independence, (they have hydro and wind and are looking towards solar (http://www.renewableenergyworld.com/rea/news/article/2011/08/germany-greece-in-talks-over-massive-solar-project)) but instead have simply just seemed to have gone without. Again the threat of turning Greece into the Cuba of the Mediterranean is a nearly empty one.

[kardashev.livejournal.com]

Getting back to Iceland (remember Iceland?) I fail to see any mention in the OP or in any of the replies to it about Iceland's energy supplies. I understand that Iceland is about as energy independent as a country can be. A remarkable 81% of Iceland's energy is from domestically produced renewable resources. Threatening to cut off oil exports to Iceland isn't that much of a threat.

It'll happen in American and Canada eventually. As the cost of oil rises and alternative energy drops the price of both will eventually intersect. Then it's bye bye OPEC.

[mikeyxw.livejournal.com]

It's really hard to compare Iceland with Greece. Iceland is a fundamentally competitive economy whose banking sector got into trouble. Their crisis is how to deal with insolvent banks. There are lots of solutions to this, Iceland chose to force the banks into receivership and keep the money. Instead of saying "because otherwise thousands of British and Dutch investors would lose their savings" you should have called them depositors. People who invest in a bank are taking risks those who deposit their money in one are not supposed to.

Greece is an uncompetitive economy that has been borrowing for a decade to make ends meet, their problem is that they can't borrow any more and therefore can't make ends meet. There are few solutions to this, even if they default, they will still need to borrow money to make ends meet... only nobody will lend to someone in default. Of course Iceland looks good when comparing themselves to Greece.

Iceland is similar to Ireland, and they took a completely opposite approach. Of course, Ireland was able to take over their banks and cover their deposits without selling their island and everything on it. There will be comparisons between the two for years to come, kind of like Japan and Sweden.

[allhatnocattle.livejournal.com]

Like personal debt. Some countries have maxed out their VISA, Mastercard and AmEX. But they've been making minimum payments so their credit rating is excellent. But now their income no longer covers the interest. So the choice is clear.

Option #1 Apply for a Diner's Club Card so they can continue to make minimum payments. Although the Diner's Club is an inferior product. Hardly anyone accepts it for purchases and the interest rates are absurdly high.

Option #2 Declare bankruptcy and eat cat food for the next seven years. (As if they'll actually have to live off cat food, lol.)

[peamasii.livejournal.com]

Greece's project was to become the banking empire for south-eastern europe, so that all its neighbours would in effect lend Greek money when there is any borrowing in their own countries. This model works well for Sweden (who is basically the chief lender to all the northern banks) and Austria for the central countries. The Greek just weren't as smart in pulling that off, and they're definitely not smart enough to fend off the IMF and the EU dogs now.

The Icelandic swindle was more of a depositor's scam. The IS people, the Brits and the Dutch deposited in IS banks to get what high percents on certificates and bonds. The IS was too small to even be coerced into the re-scam of bailouts, and they are energy-independent and still well-capitalized regardless of the failure.

[luzribeiro.livejournal.com]

I did not understand this.

[htpcl.livejournal.com]

But srsly, I was hoping for something far more substantial from someone who could've shared some great insights, hmmm?

[ddstory.livejournal.com]

I for one cannot wait for your post criticising your own society. Or better yet, why not a post about how America is getting more flak than the rest and some observations for the possible reasons for that. It would be interesting. Besides, you haven't blessed us with one of your masterpieces lately. Lazy boy! ;)

[surferelf.livejournal.com]

What do I mean with this? Well, Iceland is unique for two reasons. First, it's very small. It's tiny, the population is just 330 thousand people. Also, unlike Ireland, Greece and Portugal, Iceland has its own currency. It can devalue its currency, which the other countries in the Euro zone cannot do.

Well, also the EU was trying to blackmail Iceland to pay for private debt, but Ireland, Greece, and Portugal are facing public debt crises. Or is that an oversimplification? (Blitz)