Forex Market Commentaries - Iceland Emerges From Brief Economic Winter

As Iceland's Economic Winter Thaws What Lessons Can Be Learned By Europe's Policy Makers?

Feb 20 • Market Commentaries • 2507 Views • Comments Off on As Iceland's Economic Winter Thaws What Lessons Can Be Learned By Europe's Policy Makers?

Iceland’s approach to dealing with the meltdown was to put the needs of its population ahead of the markets at every turn.

No it’s not a typo it’s an attempt to reinforce the one workable solution that has investment banks running scared, debt forgiveness. In any other business if you mess up, you fail, you lose. If lenders pumped their gravy train full of the wrong additives, to then cause a coronary in their system, then surely the fault lies at their feet and not individuals. The collective individualisation of loans and credit in Iceland did not cause their banking system to collapse, it was the massive growth in derivatives and securities that caused the system to derail a game in which Joe public, particularly in Iceland, had no skin in..

From the outset of the crash and during the various crises that have unfolded since 2008-2009 many economic commentators suggested that rescuing ‘main street’ ahead of Wall street was the only credible long term solution as any other method would bake in stagnation or worse stagflation and create an insoluble inter-generational debt burden. And here we are, three-four years later and despite the rescues, the bailouts, the various rounds of QE and the TARP (in the USA), the overall health of the western banking problem has not improved and has arguably worsened whilst a long term solution appears no closer.

The USA will point to decreasing unemployment, GDP rising, exports likewise, but it’s been at the expense of huge public debt. The USA is past 100% debt versus national GDP and it’s hunger for debt is as voracious as ever, on current projections it’s growing at an alarming rate of circa $2.4 trillion a year. Estimates suggest that for every two dollars of growth the USA achieves it’s actually being ‘bought’ by eight dollars of debt. Since Obama took office in 2008 the national debt has increased by an eye watering 50%, in loose maths from circa ten trillion to fifteen trillion with room to explode to 16.5 inside the next four-six months. But what’s of even more concern is just how quickly the USA has burned through the latest two trillion to simply keep their system trickling up, giving ever more to the top echelons of their broken society.

So how has Iceland recovered so quickly and efficiently, in simplistic terms what did they do that other economies could re-produce? Simple, the ‘needs’ and privileges of the banking and political elite were rendered secondary to the needs of the wider population. Iceland re-set the debt clock to zero and put their people first, even going so far as to countenance the unthinkable: indicting certain high ranking banking officials who were, in the opinion of Iceland’s government to blame for the implosion.

Iceland, A Brief Economic Resume Since 2008
Since the end of 2008, Iceland’s banks have forgiven loans equivalent to 13 percent of gross domestic product, easing the debt burdens of more than a quarter of the population, according to a report published this month by the Icelandic Financial Services Association.

Iceland’s steps to resurrect itself since 2008, when its banks defaulted on $85 billion, are proving effective. Iceland’s economy will this year outgrow the euro area and the developed world on average, the Organisation for Economic Cooperation and Development estimates. It costs the same to insure versus an Icelandic default as it does to guard against a credit event in Belgium. Most polls now show Icelanders don’t want to join the European Union, where the debt crisis is in its third year.

 

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The island’s households were helped by an agreement between the government and the banks, (which are still partly controlled by the state), to forgive debt exceeding 110 percent of home values. A Supreme Court ruling in June 2010 deduced and ruled that loans indexed to foreign currencies were illegal, households no longer need to cover, for example, krona or euro losses. Without the relief, homeowners would have broken under the weight of loans, the ratio of debt to incomes surged to circa 240 percent in 2008.

Iceland’s $13 billion economy shrank 6.7 percent in 2009, it grew 2.9 percent last year and will expand 2.4 percent this year and 2013, the Paris-based OECD estimates. The euro area will grow 0.2 percent this year and the OECD area will expand 1.6 percent, according to November estimates. Housing, measured as a subcomponent in the consumer price index, is now only about 3 percent below values in September 2008, just before the collapse.

Icelanders took to the streets after the economic collapse in 2008. Protests escalated in early 2009, police used teargas to disperse crowds throwing rocks at parliament and the offices of then Prime Minister Geir Haarde. Parliament is still deciding whether to press ahead with an indictment that was brought against him in September 2009 for his role in the crisis.

A new coalition, led by Social Democrat Prime Minister Johanna Sigurdardottir, was voted into office in early 2009. The authorities are now investigating most of the main protagonists of the banking meltdown. Iceland’s special prosecutor has said it may indict as many as 90 people, while more than 200, including the former chief executives at the three biggest banks, face criminal charges.

Larus Welding, the former CEO of Glitnir Bank hf, once Iceland’s second biggest, was indicted in December for granting illegal loans and is now waiting to stand trial. The former CEO of Landsbanki Islands hf, Sigurjon Arnason, has endured stints of solitary confinement as his criminal investigation continues.

In comparison with the U.S. no top bank executives have faced criminal prosecution for their roles in the subprime mortgage meltdown. The Securities and Exchange Commission said last year it had sanctioned 39 senior officers for conduct related to the housing market meltdown.

There is an irony were Iceland is concerned as it now emerges from it’s very brief economic winter, Fitch Ratings last week raised Iceland to investment grade, with a stable outlook, and said the island’s

unorthodox crisis policy response has succeeded

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