Iceland and Debt Forgiveness

Tryggvi Thor Herbertsson writes on the Icelandic experience in this Irish Times article.

12 replies on “Iceland and Debt Forgiveness”

He’s being very “economical” with the facts.

Says nothing about currency controls imposed. Says nothing about some Icelandic mortgages priced in foreign currency and linked to inflation. Says nothing about the pension funds opposing any debt forgiveness move.

Iceland thread here:

This is also the same Dr. who co-authored the infamous “Financial Stability in Iceland” which Fred Mishkin got hammered for in the documentary “Inside Job”:

His blog is here:

Wikipedia details about him here:Þór_Herbertsson


I’ve suggested on an earlier post that the biggest problem in implementing a country wide mortage forgiveness scheme in Ireland is the ongoing crazy practice of paying €16.4bn of unguanteed bond holders in which the Govt seems incapable of arguing the case for the defense. The Icelandic story is confimation that the bond hurdle is still the issue.

The Icelandic work out to me makes sense. The current proposals and schemes on offer here look daft imho in comparisson.

I have equally argued that an affordability exercise is a receipe for disaster and Dr. Herbertsson indicates that this exercise was seemingly tried and failed in Iceland.

Without starting the ‘I told you so’ line it seems plainly obvious to me that unless any scheme is not across the board it will be extremely hard to implement and more importantly unless the unguaranteed bonds investors are wiped we simply can’t afford the ‘correct’ scheme. The scheme which I have been suggesting in where we right size ALL mortgages since 2000 against properly valued assets using a long run yield as the valuation metric.

It seems that all other schemes will run into affordability arguments and endless bickering about those who deserve a break a those who don’t. The issue is not actually about affordability its about mis priced asset.

The house prices were wrong since c2000 on my reckoning and the asociated mortgages were as a result equally wrong. Fix the price and the related mortgages using the origination LTVs, calculate difference of model to current actual mortgages and send the bill to unguaranteed bond holders. and redeploy the NAMA staffers to do the donkey work.

The consequent systemic failure led to the three system banks being put into a resolution process and new ones established by Icelandic authorities.

The plan devised in the days that followed set out how the banks would be taken into public ownership one by one. It was decided a blanket guarantee should be given to domestic depositors in local banks and that other depositors should be first in line as claimants on the assets of the banks.

This should be framed and hung in the ‘Irish Cabinet Meeting Room’ as a reminder to all Irish elected representatives of the national sabotage that was perpetrated by the Irish government in Sept 2008.

And as a reminder of the continuing supine surrender to the ECB in continuing to pay the bondholders in dead banks.

One can only admire the sheer guts of the Icelandic people.

Before swallowing this yarn hook, line a sinker, just keep in mind that this is equivalent to a post hoc rationalisation from an economic adviser to Ahern or Cowen.

Check out the professor’s positions on issues in 2008 and his subsequent positions as a politician.

The guy was also a banker when he was advising the PM and the previous PM was head of the central bank.

It makes the donnybrook in Dublin seem like Noddy’s playtime in comparison.


just asking, but if we followed this proposal and sent the bill to the bond holders would we i) not have to leave the euro ii)re-adopt a new currency and iii) go straight to primary surplus on day 1


Sounds like you’re playing the man not the ball – he may well have a history but the underlying trust of whats being said has been confirmed by the IMFs commentary today – as ever corrobative evidence does suggest he may well be right.


I believe if the argument was made in a fashion where the nuclear option of us leaving the EZ in the absence of the ECB seeing sense, was made, I think they may very well begin to see the logic.

Paying investors 100% of their cash back who took risks in now insolvent institutions without a Govt guarantee flies in the face of the normal workings of a capitalist driven market. When you play the risk game you have to allow for the fact that sometimes it pays and sometimes it doesn’t.

So to answer the questions, it depends on the ongoing negotiations with the ECB, which Noonan has indicated today in relation to Anglo is still up for discussion ‘will bring up Anglo- Irish burden share in Autumn’, he said.

We have to see our position in the overall global context.
There are paths in this that I would love to be able to work out:
Path 1: Greek Bailout is not implemented (20%) – > European banking collapse (80%) – > worldwide banking collapse (80%) -> global solution to the debt crisis (tot. prob.=11%)
Path 2: EFSF not adequate to cover all bank and national debt (70%) – >European banking collapse (80%) – > worldwide banking collapse (80%) -> global solution to the debt crisis (46%)
Path 3: SocGen or similar has a liquidity crisis (80%) – > General Liquidity crisis (80%) -> Euro breakdown (70%)- > Global solution to debt crisis (43%)

Just on these three scenarios alone there is a 43% chance that what began as an Irish debt crisis requiring Irish solutions will become a global crisis requiring a global fix.

So – let’s hold tight – keep reducing deficit but not endangering social cohesion and our debt forgiveness will come (but as part of a global solution)
This is the first instance where I can say I think that the Govt has got it right

@ Yields or Bust

Besides being in a currency union, in contrast with Iceland, the Irish government unilaterally decided to guarantee bank debt, the only EMU country to do so.

Once that was decided, other options were foreclosed.

The ECB didn’t have a policy on protection of bondholders at that time.

As for threats etc, that is just fanciful as the ECB had been the main inter-bank bank funder since Aug 2007.

The die was cast and that was that.


Is it not the case that the ECB were not going to let, or at least were going to do all they could, to not let a bank fail in the wake of Lehmans?

Further as Ireland was always going to be heavily dependent on ECB funding the ECB was always going to have leverage over the State to block decent burden sharing.

If the ECB won’t let us (and how this is in their remit I don’t know) write down senior debt in a bank that has no deposits and is being wound down, three years after going bust six times over it seems unlikely that they would have let us wind teh bank during the height of the financial crisis.

Further, the guarantee of bank debts for two years patently did not foreclose all other options. Specifically. we could write down un guaranteed senior debt after the guarantee expired.

On what basis do you say the ECB had no policy in relation to senior bond holders post lehmans? I remember further bank collapses being considered a harbinger of doom at the time –

Of course we don’t even have any official confirmation of what teh ECB would do if we wrote down senior debt – we just have vague leaked threats in teh papers and comments by german officials saying they won’t support teh write down because German banks lost alot on their operations in teh IFSC – (No mention of stability there – just plain power politics- promote the interests of your own private sector, irrespective of the morality of the situation)

The ECB were and are concerned about stability – and in particular the availability and cost of long term funding to eurozone banks – they feel that losses on seniors threatens that and brings few benefits to their goals. Further, they think that there is no reality to getting other eurozone members to bail out the losses. Therefore they oppose losses.

there is nothing in this calculation that has changed since Lehmans – if anything they were more concerned about the stability impact of losses on seniors in 2008/09. As such i see no reason to believe that teh ECB would have sat by while we imposed losses on seniors at Anglo.


You said it in one – Government Guaranteed Bonds – I never mentioned Guaranteed bonds.

I’m suggesting that there still remains c€16.4bn of Unguaranteed Bonds outstanding, which are not part of the EU/IMF agreement over which the ECB and the Sovereign have no agreement other than a ‘nod an a wink’ scheme as reported between the Prof. Hon and JCT – in simple terms no agreement.

Noonan suggested today that it was going to be very difficult to get agreement with the ECB in relation to Anglo (assumption being subs and Unguaranteed). For the life of me I can’t see why but that’s probably because my negotiation stance and the DoF differs. The ECB sees logic in paying 100% of unguaranteed bond holders in insolvent institutions whereas I and many others don’t.

Normal rules as adopted elsewhere in relation to risk sharing would suggest the ECB are not living in the real world in this regards and as indicated there is no doubt that with a haricut already given against Sovereign debt why should private unguaranteed debt be treated any way differently.

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