An Fear Rua - The recovery of Iceland

Ozzy

(1,867 Posts)

Posted: 03-May-2012 12:04

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Was at an event three years ago at which Jim Power said we couldn't contemplate David McWilliams suggestion leaving the euro or we'd end up like Iceland. It might not have been the worst thing.

GRINDAVIK, Iceland - Mon Apr 30, 2012 10:47am EDT

GRINDAVIK, Iceland (Reuters) - In this small Icelandic village, sailors are making double their pre-crisis pay, haddock sales to places like Boston and Brussels are booming and unemployment is almost zero - signs of this island's surprisingly rapid rise from the ashes of banking ruin.

While much of Europe wallows in recession, the economy of this volcanic island in the mid Atlantic is growing at a clip that has surprised many people, thanks to a currency fall - in which the crown lost almost half its value to the euro - an export and tourism boom as well as growing consumer confidence.

"This is probably one of our best years," said Arnthor Einarsson, a fisherman readying his boat for his next catch as seagulls circle huge piles of fishing nets on a rocky peninsula about one hour south of the capital Reykjavik.

Only a few years ago, a banking boom in which the sector's assets grew to 10 times the country's GDP lured many of Iceland's 320,000 population from traditional industries into the world of finance. Fisherman got into banking and sailors speculated on booming real estate.

Those heady days have gone. Gas-guzzling Land Rovers have been replaced with fuel-efficient Volkswagens, a sign perhaps of a more sober consumer mood in which economic growth is based on a steady expansion of exports rather than flash-in-the-pan speculation.

The wounds that sparked massive street protests against the financial elite are slowly healing. Even the then prime minister has been tried by a special court, closing one chapter.

Granted, there is still a long way to go, but many see Iceland as offering a lesson particularly to European countries such as Greece and Spain, stuck with shrinking economies and lacking the option of devaluing to boost their international competitiveness.

Iceland's GDP growth estimated at some 2.6 percent this year will outshine even powerhouses like Sweden.

"These are among the highest numbers in Europe," said Finance Minister Steingrimur Sigfusson. "Sometimes it is easier to turn a small boat around than a big ship."

Currency depreciation though is only part of the picture.

Capital controls, progressive taxes and a careful phasing-in of austerity measures were also key to getting the country back on track, bringing a more than 10 percent fiscal deficit back to a near balance.

Iceland also did what other parts of Europe haven't dared to do - let its banks go under. It took some of the cost itself but forced foreign creditors to take the biggest hit.

Lauded by some economists for taking unorthodox measures to fix its broken economy, others see it as a one-off example that would be hard to replicate.

"The lessons don't transfer directly because of the relative size of the old banks in relation to the economy. What we were left with was quite manageable," said Jon Bentsson, senior economist at Islandsbanki.

BACK TO BASICS

Three years after its near meltdown, Iceland looks healthy on many measures. It successfully finished an IMF bailout program and has already made one early repayment. It expects the sale of assets from failed bank Landsbanki to cover its $5 billion in debts to Britain and the Netherlands.

In February, Iceland recovered its investment-grade rating from Fitch, which praised the country for restoring macroeconomic stability, adding to investment-grade ratings from Standard and Poor's and Moody's Investors Service.

Icelanders are getting work, going shopping and their house prices are rising again.

And while the penthouse of a gleaming new skyscraper in downtown Reykjavik sits empty, Icelanders are piling into a hip new restaurant on the ground floor called the Hamburger Factory.

Car sales doubled in the first quarter. Jon Olafsson, who runs an auto dealership on the outskirts of Reykjavik, expects to sell almost 1,000 cars this year, having sold less than 100 cars in 2009.

"This is a high volume day for us," he says, pointing at a shiny row of cars just rolled out on his lot. His customers are back en masse, hunting for leaner, greener cars, and he is recruiting staff to meet demand.

While signs point to recovery, many remain cautious about the future and bitter over the past.

Household debt exceeds 200 percent of GDP. The government must deal with the issue of capital controls, imposed after the crisis but which are seen by some economists as denting foreign investment confidence.

There is little trust in government three years after the fall of ex-Prime Minister Geir Haarde. Parliament has the support of only 10 percent of the public, polls show.

Pall Matthiasson, chief executive of mental health services at the National University Hospital of Iceland, flips through slides on his iPad showing the five stages of grief.

He says Icelanders remain in a state of depression.

"There is cohesive guilt, because only so much anger can be directed at the bankers," he said. "It's like looking in the mirror and asking 'did I do that'? It comes back to haunt us."

CLOSE THE TRENCHES

Many just want a clean slate.

That can be seen no more clearly than in recent polls which show a surprisingly strong lead for presidential candidate Thora Arnorsdottir, a fresh-faced mother who is due to give birth to her sixth child at the end of May.

In an election due at the end of June, the 37-year-old goes up against President Olafur Grimsson, who is running for a fifth four-year term having a few years back cheered on those who drove the country's banking expansion.

Haarde's trial, she says, was difficult for the nation.

"Instead of being a step towards reconciliation, it has been more an opening up of wounds," she told Reuters, curled up on a sofa in her suburban home and peeking out of her window every few minutes to check on her children.

People told her they couldn't bear to watch the news anymore.

"I feel that we can get through this without taking out the daggers," said Arnorsdottir, a journalist who also has her own quiz show. "My hope is to use the influence of the presidency to close the trenches."

Haarde, the world's only political leader to be tried for crimes related to the global crisis, was found innocent of major charges of gross negligence but guilty of failing to hold dedicated cabinet meetings ahead of the collapse.

In the months ahead, Iceland will bring former banking executives to stand trial, so the pain is not over.

Icelanders will meanwhile get on with their recovery.

"Did Icelanders have an identity crisis? Yes," said Egill Helgason, one of Iceland's best-known television commentators. "They thought they were financial wizards, but it was all an illusion ... Now it's back to books, music, and well, fish."

(Editing by Alistair Scrutton and David Holmes)

This message has been edited - 04-may-2012 @ 00:00

labane1917

(1,438 Posts)

Posted: 03-May-2012 16:39

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+1 for Iceland. Puts to shame global efforts that are being made to protect "too big to fail" banks who were the primary culprits in the financial collapse. Also exposes the lie that nobody will lend to countries that default. Being on the road to recovery now due to making the hard decisions means Iceland is able to borrow again. If you were a lender today who would you lend to, Iceland or Greece (or Spain for that matter)? Fair play to them, and locking up a few bankers and politicians is just icing on the cake.

Prof Honeydew

(748 Posts)

Posted: 03-May-2012 17:42

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I was in Iceland in late 2010. The picture I saw then was nowhere near as rosy as the article quoted here. The place was even more depressed than Ireland at the time. Nothing was moving, nobody buying, nobody selling, nobody going out, full of gleaming buildings with nobody in them. Emigration was a major topic of conversation.

And like ourselves, the population was divided between the whingers and those getting on with their lives. I don't speak Icelandic but, from conversation with the locals, it appeared that the media were obsessed with finding someone other than themselves to blame.

The situation seemed to be worst in Reykjavik and the area around it - where the majority of the people live. Away from the capital, things seemed to be better as the main economic activities of fishing and agriculture were benefitting from higher commodity proces. The main industries - heavy power consumers like aluminium smelters - were also benefitting from high oil prices as, unlike many of their competitors, their energy costs were based on hydroelectric and geothermal. Tourism was also faring reasonably OK with the downturn in the domestic market being compensated by foreigners taking advantage in the halving of costs due to devaluation.

There were a couple of major differences between Iceland's problems and ours. Unlike us, they didn't have immediate funding difficulties resulting from a huge deficit in current Government spending. As a result, they weren't as dependent on the bond markets.

On the downside, however, very many people lost their entire life savings when their banks were allowed to go under. And making matters even worse as regards personal assets, not only did property values halve in krona terms but, since most home loans were denominated in foreign currencies, the outstanding principal on mortgages doubled as a result of the krona going from 80 to the euro to 160.

I have serious doubts as to whether Ireland could have dealt with the downturn as Iceland did. Because we have 13 times the population and a more diversified and complex internal economy, bank collapse and its resultant depositor wipeout would have wrought havoc through the supply chains in the retail and service sectors and caused serious difficulties in agriculture and indigenous industry. We were also an international problem and Iceland wasn't. The most any individual creditor was stung for their bank collapses was a few billion which is nothing more than a pin-------- when judged by the scale of recent events.

I'd also hate to think of the political consequences if up to a million people saw their life savings go up in smoke.

Iceland may be clawing its way back out of a recession but much of that is due to favourable trends in the main sectors of their economy. The basis behind their boom of the previous twenty years was to reduce their dependence on commodity prices and they thought that international sevices was the way to go. Now they're back to square one, maybe a bit wiser and maybe a bit humbler. Like ourselves, it's been a rough learning experience.

labane1917

(1,438 Posts)

Posted: 03-May-2012 18:04

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Great post Prof, but it is now 2012 and they are well on their way to recovery. Can we say the same about Ireland, Greece, Spain, Italy, or the whole of the EU for that matter?
Almost every country in the EU with the exception of Germany and France is officially now back in recession, four years after the financial collapse. It remains to be seen how bad this current recession gets, I would not be too hopefull.

This message has been edited - 03-may-2012 @ 18:07

inbetweeners

(413 Posts)

Posted: 03-May-2012 18:30

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Originally posted by labane1917:
Great post Prof, but it is now 2012 and they are well on their way to recovery. Can we say the same about Ireland, Greece, Spain, Italy, or the whole of the EU for that matter?
Almost every country in the EU with the exception of Germany and France is officially now back in recession, four years after the financial collapse. It remains to be seen how bad this current recession gets, I would not be too hopefull.

10 of the EU 27 are back in recession. That is hardly almost every country.

Mind you there will probably be 5 more next quarter and the EU 27 as a whole will likely be in recession aswell.

BeTimberin

(2,458 Posts)

Posted: 03-May-2012 19:17

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The one major difference id see in making comparisons between ourselves and Iceland is that they did not have next nore near the funds invested in a property market that we did....

Very hard to actively compare recovery etc. I do feel that home-grown industry is our best option for economic growth going forward(in the same way as fishing and tourism will be there big spinners) but you cant compare our recovery process in the circumstances!

stones_off

(2,815 Posts)

Posted: 04-May-2012 08:55

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Originally posted by inbetweeners:
10 of the EU 27 are back in recession. That is hardly almost every country.Mind you there will probably be 5 more next quarter and the EU 27 as a whole will likely be in recession aswell.

Countries in recession are, according to the business section of the irish independent:

Netherlands
Belgium
Denmark
Ireland
UK
Portugal
Spain
Italy
Greece
Cyprus
Slovenia
Czech Republic

inbetweeners

(413 Posts)

Posted: 04-May-2012 09:52

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I will go with Eurostat if you don't mind.

IMF Senior Official

(97 Posts)

Posted: 04-May-2012 10:52

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Originally posted by inbetweeners:
I will go with Eurostat if you don't mind.

Result practically the same with Eurostat !

asdf

(332 Posts)

Posted: 04-May-2012 11:24

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Originally posted by Prof Honeydew:
I have serious doubts as to whether Ireland could have dealt with the downturn as Iceland did. Because we have 13 times the population and a more diversified and complex internal economy, bank collapse and its resultant depositor wipeout would have wrought havoc through the supply chains in the retail and service sectors and caused serious difficulties in agriculture and indigenous industry. We were also an international problem and Iceland wasn't. The most any individual creditor was stung for their bank collapses was a few billion which is nothing more than a pin-------- when judged by the scale of recent events.
I'd also hate to think of the political consequences if up to a million people saw their life savings go up in smoke.

Can you explain how the life savings of people here in Ireland would have been wiped out when we have a deposit guarantee scheme of up to 100K?

Coddler

(523 Posts)

Posted: 04-May-2012 11:51

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Originally posted by Prof Honeydew:
On the downside, however, very many people lost their entire life savings when their banks were allowed to go under. And making matters even worse as regards personal assets, not only did property values halve in krona terms but, since most home loans were denominated in foreign currencies, the outstanding principal on mortgages doubled as a result of the krona going from 80 to the euro to 160.

Did people lose their savings completely or were they used to reduce the person’s debt in a trade off?

A simple example would be if someone had a €100,000 mortgage with the bank and say €30,000 on deposit then it would be fair and logical that the 30k lost in the bank going under would be deducted from the mortgage principal and so leave 70k outstanding on the mortgage.

Obviously it would be more complex if mortgage and deposits were held in different institutions but the state/ legal system could intervene in those cases and apply the same principle.

I find it hard to believe that the Icelanders would allow people’s savings to disappear in the banking collapse while allowing people’s debt to reamin entirely intact.

inbetweeners

(413 Posts)

Posted: 04-May-2012 12:03

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Originally posted by IMF Senior Official:
Result practically the same with Eurostat !

Yes very good. I have the Wall street Journal aswell.

Eurostat was updated since. I can only go on what I read at the time.

UK will be revised out of their "recession" soon enough anyway.

The salient point remains that almost all countries in the EU are not in recession.

Prof Honeydew

(748 Posts)

Posted: 04-May-2012 23:28

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Originally posted by Coddler:
Did people lose their savings completely or were they used to reduce the person’s debt in a trade off?A simple example would be if someone had a €100,000 mortgage with the bank and say €30,000 on deposit then it would be fair and logical that the 30k lost in the bank going under would be deducted from the mortgage principal and so leave 70k outstanding on the mortgage.Obviously it would be more complex if mortgage and deposits were held in different institutions but the state/ legal system could intervene in those cases and apply the same principle.I find it hard to believe that the Icelanders would allow people’s savings to disappear in the banking collapse while allowing people’s debt to reamin entirely intact.

I'm not completely sure what the sitauation was but this is my recollection of what people were telling me and my interpretation of other things I've read in the meantime.

When the Icelandic banks collapsed, the amount of money written off on commercial loans was well in excess of their assets (somewhat on the scale of Anglo and Irish Nationwide). Much of that was due to a few tycoons running up massive personal debts like investing in West Ham. In relative terms, their losses were way beyond any of our own megalomaniac chancers.

The immediate cause of the collapse was the biggest of them (Glitnir I think it was called) running out of money because it couldn't raise any more from the inter-bank market, bonds or any other source. The other two were gone within days of it closing its doors.

Much of the asset base came from deposits (it would seem to have been a greater proportion than in the case of Irish banks who were relatively more dependent on the bond market) and, in the years immediately preceding the crash, they'd been advertising heavily outside of Iceland. When the $hit hit the fan, the Government may have been less worried about the depositors than ours was because most of them were outside the country. However, the Brits and the Dutch were less than impressed and started looking for their money (about €5 billion - the equivalent of about €65 billion in relative terms to the Irish economy). That row still has to be sorted out and is causing Iceland serious ongoing problems, particularly in relation to its application to join the EU.

Naturally, Icelandic depositors got hit the same as the Brits and the Tulips. Many, if not a majority of them, were people who hadn't taken out loans at all but were just saving up their kronur for retirement. From what I could gather, these savers were the main group banging their pots and pans outside the parliament and demanding the head of Prime Minister Haarde.

However, the Government extracted anything that might have some value from the wreckage of banks, including mortgages, performing loans and loans that hadn't deteriorated beyond hope. As far as I can make out, these were transferred into a separate vehicle (much like how performing Anglo business was transferred to AIB and Nationwide's to Permanent TSB) and this may have been used as a basis for the new banks set up. However, it's likely that any value from profitable business will be used first of all to get the Brits and the Dutch off their backs, If that's the case, there's unllikely to be anything left over.

Mortgages would be lumped into this performing business. Someone, either the new banks or some outside business, has taken over the loan book. Maybe they've picked it up as a discount but they'll be out to collect their money if there's any chance of getting it. However, there's an additional problem in Iceland compared to ours. Nealy all mortgages taken out during the boom were in euros rather than in kronur because interest rates were much lower and no one expected a devaluation after a long period of fixed exchange rates. Now that the krona is worth only half what it was in 2008, the principle owed has doubled.

I suppose the biggest difference then is that savers in Iceland took a bigger hit while it's the taxpayers in Ireland. I'll leave it to others to decide which is fairer.

carryharry

(4,804 Posts)

Posted: 04-May-2012 23:35

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Good man Prof, again a good post.

Not so rosey in the garden as many would have you believe.

blueblaa

(1,754 Posts)

Posted: 04-May-2012 23:49

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Excellent post Prof.

I always think this comparing different countries a very inexact science as the causes and symptoms of economic problems is different from country to country.

Even if everything was rosey in the Icelandic garden they didn't have to deal with a huge current deficit on top of a property bubble on top of a banking implosion. While we don't have to deal with savings disappearing while debts doubling due to currency devaluation (yet !!).

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