The FT has quite a lot of articles and letters on the Iceland situation. This op-ed provides an interesting historical perspective on the gains to debt repayment.
The FT has quite a lot of articles and letters on the Iceland situation. This op-ed provides an interesting historical perspective on the gains to debt repayment.
12 replies on “The Long-Term Gains to Debt Repayment”
If I were an Icelander I would be looking for advice based on more broad-based research. The anecdote of Finland is interesting but it is not necessarily instructive. Was the repayment of the war debt the only reason for the more generous settlement after WWII? Rogoff and Reinhart have done extensive research on national default. Does their work point to the degree of benefit from not defaulting? I have not completed the book but so far that point has not been directly addressed. Furthermore, I am not sue that it touches on the rationale of compulsory state guarantees for bank deposits.
@zhou: Barry Eichengreen has shown that countries that defaulted during the Great Depression did better (in terms of GDP growth) than those that did not. They were eventually punished, by paying higher interest rates when capital markets eventually opened up again…in the 1970s.
Thanks K.O’R.
I am in favour of not defaulting on consumers and that the EU is correct to seek to limit domestic default within the EU/EEA. However, I am not aware that the EU Commission or the ECB has issued a recommendation to Iceland on its specific situation.
On the other hand, I think the EU needs to support default on bondholders / non-consumer deposits where appropriate. To this end we need community-wide regulation on how financial crises are to be managed with particular emphasis on special resolution regimes and changes in regulations in an attempt to ensure that banks can fail without crippling a nation state.
That is a tall order. One wonders will such an objective be abandoned in favour of the easier task of making it highly unlikely that banks will fail in the future.
Germany tried to pay up after WWI too and look what happened to them.
@Zhou
“On the other hand, I think the EU needs to support default on bondholders / non-consumer deposits where appropriate.”
I presume you mean debt-to-equity swaps/writedowns? Or are you talking about outright default?
“That is a tall order. One wonders will such an objective be abandoned in favour of the easier task of making it highly unlikely that banks will fail in the future.”
Indeed it is. Probably best to start small with a couple of non-systemic (in the European sense) banks on the periphery of the eurozone financial system…
I think the two go hand in hand. There is no point setting up a new system that makes it easier to resolve bust banks if you are going to have to use it a lot, since it will be an insurance policy that doesn’t account for risk – a permanent claims bonus. So you have to make it both unlikely that banks will fail and easy (or at least possible and obvious) to resolve them if they do. There will always be fraud and more often stupidity, so just making failure unlikely is not going to stop failures.
I think the op-ed and a lot of commentary in the UK frames the issue incorrectly. Iceland has already offered to repay and that August 2009 bill has been passed by the Althing and signed by their President. The Netherlands and the UK now want a harsher settlement which will not be tied to GDP growth in Iceland unlike the August 2009 deal. Icelanders want to repay but on their own terms.
P. Lane: An important difference between Finland and Iceland is that Icelandic debts were not sovereign debts to begin with. They were incurred by private parties and not by an elected government.
An interesting article here too on debt repayment:
http://news.bbc.co.uk/2/hi/business/8450518.stm
YM: “I presume you mean debt-to-equity swaps/writedowns? ”
Yes – I consider that to be a de-facto default.
Martin Wolf’s view: “This is not about cutting a running deficit, which is, indeed, unavoidable. It is about forcing innocent people to assume gigantic liabilities for which they have no legal or moral responsibility. How would UK citizens feel if they were forced to assume a debt of £400bn because of HSBC’s failure to meet deposit insurance liabilities in Asia? Let the UK take the bank’s assets and leave it at that.”
http://blogs.ft.com/economistsforum/2010/01/icelands-president-blocks-e39bn-repayment-deal-what-do-you-think/
I think the finance world needs to have a mind set change regarding debt after this crisis.
If you invest in non risk free government debt/deposits/bonds you have to accept the risk that is giving you that extra yield.
If you are unwilling to accept this risk then buy a diversified portfolio of goverment bonds
@Garo
“An important difference between Finland and Iceland is that Icelandic debts were not sovereign debts to begin with. They were incurred by private parties and not by an elected government.”
I agree. The British press is behaving as if this was money lent to the Icelandic state but its money they chose to pay to British depositors above and beyond what current legislation guaranteed them. So they paid out money and then demanded Iceland pay it back. It’s not the same thing at all.
Zhou
“To this end we need community-wide regulation on how financial crises are to be managed with particular emphasis on special resolution regimes and changes in regulations in an attempt to ensure that banks can fail without crippling a nation state.”
Interestin’, you anticipate many more global financial crises?
Would it not be better to avoid the occasion of sin altogether, through saintly Prudence?
Sarah Carey
The Brit press like the US press, is owned by the co and will continue to harangue the Icelanders. Whay pressure was brought to bear on the clowns in Ireland to take out 54,000,000,000 euro to buy dross from insolvent banks? There is a machine behind all this money, dedicated to keeping it so as to enjoy all the spoils soon to be on offer!
Of course, countries that default do better! They are freer for a start. They do not say “well we must borrow again, someday”! It takes two parties to slavery, the borrower and the lender. Which is the more responsible? Thode lenders who gave Irish banks all that play money want it back. Buy should they not have known about the credit glut better than the Irish banks? One enthusiastic borrower, one dubious banker. The only way to stop this reckless kondratieff cycle is to teach bankers that they can lose their funds! Letting them strongarm Icelanders publicly or Irelanders privately, is something that is to be discouraged.
Yoga N Mahew
“I think the two go hand in hand. There is no point setting up a new system that makes it easier to resolve bust banks if you are going to have to use it a lot, since it will be an insurance policy that doesn’t account for risk – a permanent claims bonus. So you have to make it both unlikely that banks will fail and easy (or at least possible and obvious) to resolve them if they do. There will always be fraud and more often stupidity, so just making failure unlikely is not going to stop failures.”
Precisely! This is the moral prejudice jeopardy or whatever the phrase is. By Paying out we encourage the too big too fraudulent to fail!
The only longterm gain to repaying badly acquired debt is that more moneylenders will line up outside your door and ask your corruptable politicians, 66% say, to sell more citizens into slavery!