Bust and boom

Matthew Lynn

13 November 2010

/article_images/articledir_12913/6456753/1_listing.jpg

Iceland is recovering from its financial shock – without the aid of a bank bailout

It’s been a good week for the admittedly small band of people who get excited about the decisions made by central banks. In America, the Federal Reserve embarked on a second great round of printing money. In this country, the Bank of England abandoned any idea of controlling inflation, leaving interest rates at a three-century low despite having missed its inflation target for seven months.

But by far the most interesting decision was made a long way to the north, in a country which people usually only pay attention to when its banks or volcanoes blow up, bringing either the financial or air traffic system grinding to a halt. Mar Gudmundsson, the governor of the Icelandic Central Bank, cut his country’s interest rate, bringing it down to a fairly normal 5.5 per cent. And he wasn’t trying to stave off a banking collapse or salvage an economy as it plunged into recession. It was just part of a slow process of getting business back to usual.

Iceland, I hear you say. Isn’t that the country that got wiped out by the credit crunch? The place where they are all shivering in the dark, eating cod tails, and wondering whether a single pack of candles will last them through the winter? Yes, that one. Two years on from the credit crunch, however, Iceland hasn’t stepped back into the Palaeolithic era. All those experts who told us in 2008 that the only alternative to rescuing the banks was economic Armageddon turn out to have been not quite right. Iceland’s three big banks, Glitnir, Kaupthing and Landsbanki, did end up being taken over by the state, but, while domestic depositors were protected, the government didn’t attempt to meet all international obligations. Kaupthing, for example, is being wound down, and has been renamed Arion Bank. This approach was very different to the British, American and Irish bank rescues, which tried to cover all bank losses by pumping untold billions of taxpayers’ money into financial institutions.

1 | 2 | 3 Next page

More articles from: Matthew Lynn | this section

Print this article | Email to a friend | Permalink | Comments (4)

Post this entry to: del.icio.us | Digg | Newsvine | NowPublic | Reddit

Post comment

Ludvik Juliusson

November 19th, 2010 11:48am Report this comment

the future isn't that bright! All forecasts on GDP growth have been revised downward since. Instead of having a 3% GDP growth for the next 2 years the prospect is for a 1,5% annual growth. When this is set into context the Icelandic economy will be 8% smaller by the end of 2012 than it was in 2008.

The currency restrictions in place are also strange. They allow individuals with high capital income to skip repatriating their income, while forcing EU citizens who have become domestic parties in Iceland, to repatriate income from bank accounts which they had from before 2008. Even incomes as low as 0,01 Pounds even if it costs 3 pounds!! This is senseless!

The currency restrictions also have what is called off-shore ISK(Icelandic krona) which has a lower value than the onshore ISK. That means that if an investor wants to invest in Iceland for 1 million Euros he could either buy off-shore ISK and get 240 million ISK or buy on-shore ISK and only get 150 millioin ISK. The Central bank can choose who can buy and use the off-shore ISK in Iceland with no set clear guidelines. That is a clear path to corruption. Why aren't all investors equal?

The Icelandic Central bank even forbidds Icelanders who are residents in Iceland to continue relationships with EU citizens by not allowing Icelanders to pay common costs outside of Iceland. So breaking up relationships and families is a method the Icelandic government and the Central bank think is good for the economy.

Is Iceland still a good example? NO!

GUSKU

November 21st, 2010 12:08am Report this comment

I would like to thank Matthew Lynn for your good article about one of the most important economic question of our time.

You are absolutely right about taxpayers money and the banks. Many politicians, mostly on the left side, believe they can solve the debt crises with bigger debts. That will only lead us back to the 30�s. Look at what Mr. Brown has done to your country! It is a shame and enslaves generations to come to pay for the banks misbehaviour of today.

The main problem in Iceland now is the Socialistic Government that is doing everything wrong and increasing the crises instead of stimulating people and businesses to economic recovery. It was the former Government led by the Independence party that saved Iceland from total economic meltdown.

The problem is the unresponsible behaviour of private bankers that earn money by collecting debts. It is easy for them with a power, that in the beginning was only ment for the state: i.e. controlling the amount of money available to all. The banks create money out of nothing and charge interest rate for that. Lending out the same krona or Sterling pound up to ten times is not working and has to be put to an end if we want to have a more stabile economy.

The people in Europe should unite and follow the Icelandic example and stop the politicians from transfering taxpayers money to rutten banks. Maybe we islands population in the North Atlantic can be strong enough to do that. The whole EU is at stake, the Central Bank of the EU is snart empty of euros saving troubled banks in Greece, Ireland, Portugal, Spain and soon UK?

Charles Barry

November 22nd, 2010 3:16pm Report this comment

An interesting counter-example to the current orthodoxy, so thank you for this Matthew Lynn.

However I wonder about two things: firstly, is the situation in Iceland that similar to Ireland/UK/Greece? I think not, mostly on the fact that interest rates are in totally different places in Iceland to the main european economies.

I think Mervyn King would cut his right arm off for the prospect of being able to lower interest rates by 11% or so (as the central bank in iceland has done). I suspect most of the negative effects of the iceland banking policy was counteracted by this.

Secondly, even if the banking policy was overall to the net benefit of Iceland, does it scale in a linear or non-linear fashion? Iceland's banking debts are roughly 86 billion, you said. In the UK they are in the region of 7 trillion. I am unsure whether this greater size would be necessarily be absorbed by the UK's greater size.

Anyhow, good article, and I look forward when the dust has settled (in say, 5 years time) to study this period for a post-graduate degree.

Ragnar

November 23rd, 2010 2:36pm Report this comment

Brilliant article. Your ideas are echoed in the highest places, e.g. :

Paul Tucker:

"An increasing number of national authorities have already established or are prospectively establishing Special Resolution Regimes for the resolution of commercial banks, enabling the transfer of deposits and good assets to another bank, with bad assets and other creditor claims going into an insolvency process. At a high level of generality, a distressed bank is split into a continuing good bank, typically acquired by a healthy bank; and a gone-concern bad bank, which goes into administration. Insured deposits travel with the ‘good bank’. All other creditors typically travel with the ‘bad bank’ and become claimants in the insolvency."

http://www.bankofengland.co.uk/publications/speeches/2010/speech431.pdf

Michel Barnier, EU Commissionner "The aim is to ensure that the costs of the difficulties are borne by shareholders and by unsecured creditors, and not by taxpayers, while ensuring financial stability and continuity of services to users." http://europa.eu/rapid/pressReleasesAction.do?reference=SPEECH/10/112&format=HTML&aged=0&language=EN&guiLanguage=en

Post comment