More on Iceland

In view of the frequent comparisons of Iceland and Ireland, it is important to keep up with the nuances of the literature on the Icelandic case.  Additional insights are provided in this new VOX article by Fridik Mar Baldursson.

30 replies on “More on Iceland”

I read it and I wept.

Even the bit where the Icelanders are being chided for tardiness:

“It was clear from the outset that an efficient insolvency regime would be needed for Iceland in order to manage widespread insolvency among firms as well as households after the crisis and to quickly place the new banks on a sound footing – to make them good banks. Progress on this front has been slow. This has been a costly failure. The rate of progress on the debt workout of firms has been excruciating – delinquent loans are 30% of the loan book of the banks. It took more than two years to change the law on personal insolvency such that households deeply in debt can be provided a fresh start in a similar way as under the US regime, and the execution has advanced very slowly.”

It took them two years! Terrible. After all we got that bit done way back in er, oh dear.

I notice that the author’s primary focus is on net public debt, rather than gross public debt, where he says:

“Net public debt is now a manageable 44% of GDP (Figure 3).”

This is, of course, the correct way to look at it, although media commentators and others in Ireland, out to sensationalise and earn celebrity status, rather than give accurate information, focus on gross public debt. Maybe Icelandic commentators are a bit more rational and give priority to accuracy rather than getting spots on the bill at comedy festivals.

From the same chart, Ireland’s net public debt is about 70% of GDP. This is lower than Portugal and about half that in Greece, which are also both given in the chart. From memory, I think that Ireland’s net public debt (as a percentage of GDP) is not far off the EU average, and certainly lower than in the US.

OMG!! If the Icelanders default on their bank debt there will be chaos— Absolute chaos. The banks will shut down. Civil servants won’t be paid. The Eurozone will collapse! The ATMs will stop working.

We can be certain that if Iceland defaults there will be an economic apocalypse….. Oh wait…..


to parallel – from the heterodox wing of the IMF … [+ relevant links]

Lessons for the IMF

What, then, should the IMF take away from its cooperation with Iceland? The Fund learned three main lessons, Shafik said.

•When countries have a clear strategy in mind, as was the case in Iceland, it becomes much easier for the IMF to engage and provide policy support and advice.

•There are clear advantages to having a heterodox toolkit―more tools are better than fewer.

•Iceland set an example by managing to preserve, and even strengthen, its welfare state during the crisis.

Recent IMF research has shown that countries tend to grow faster and more consistently when income distribution is more equitable, so the Fund is now paying much more attention to these issues in its programs, she said.


“The ATMs will stop working.”

Gettin a fair bit sick o this one! Let them.

Wouldn’t be lovely to walk into a bank and converse with a heterodox teller with a smile while she counts out the dosh and gently requests if there is anything further she can do to assist her customer/owner. An overdraft or a short term business loan wouldn’t go astray either – O for the good ol’ days …

There are some charts comparing Iceland and Ireland using the IMF’s World Economic Outlook database here. For many of the indicators it is hard to find a difference between the two countries. For other Iceland fares better; for some Ireland does better.

@Philip Lane

Very good article, thanks for posting.

There are plenty of practical reasons for us honouring our debt obligations no matter how morally unfair it is and punitive to our economy, namely because of our commitments to the Eurozone and bank exposure to ECB/CBI lending, but the plain facts speak for themselves in the one graph showing CDS spreads in Ireland v’s Iceland.

Iceland injected 20% of their GDP into their banking system, devalued their currency and burned everyone else, we injected 60% of our GDP in and honoured everyone else and can’t devalue our currency.

The markets, rightly or wrongly have determined that the actions taken by Iceland were necessary and did not mean investors would never make a buck from purchasing their bonds, and in Ireland, the markets believe the debt burden from of our banking system is too high for the state to honour and they are pricing in a default and a credit event taking place.

Ultimately as Monsieur Kelly has stated in the past, we are relying on the kindness of strangers, and unless we achieve significant debt write down through alteration of promissory notes or otherwise, and achieve substantial economic growth, CDS prices will continue to remain high and unlike Iceland investors will not credibly believe that our debt burden is sustainable.

“From memory, I think that Ireland’s net public debt (as a percentage of GDP) is not far off the EU average, and certainly lower than in the US.”

What are you subtracting from Irish gross debt to get such low net debt figures? We had €16bn in cash at end 2010 from pre-funding which takes about 10pp off the gross figure as a % of GDP. That still leaves us around 100% net debt to GDP at present I believe and climbing all the time. As a % of GNP it is obviously higher again.

What other liquid assets does the state own? There is still around €5bn left to be raided from the NPRF but that will only get you another 3pp or so. How do you arrive at 70% on a net basis? Anyway, I’m pretty sure that US net debt to GDP has yet to breach 70%.

@John Kennedy
“There are plenty of practical reasons for us honouring our debt obligations no matter how morally unfair it is and punitive to our economy”

Strange contradictory comment. There is never anything morally unfair about honouring ones debt obligations.
Who has ever suggested such a thing? I and many others have serious problems on many levels – moral hazard just one about picking up the tab for other peoples debts.

Fintan O Toole has a piece in todays IT. A few comments in it worth repeating.

“what happened in Ireland: the payment of a billion dollars to unsecured Anglo Irish Bank bondholders. Apart from its obvious obscenity, the most striking aspect of this was that, for the first time, we had a government performing an action it openly declared to be wrong. Michael Noonan wasn’t handing over these vast sums of cash from a bankrupt nation to vulture capitalist gamblers because he thought it was a good idea. He was doing it because there was a gun to his head. The threat came from the European Central Bank and it was as crude as it was brutal: give the spivs your taxpayers’ money or we’ll bring down your banking system.”

and his conclusion

“We can have the form of rapacious finance capitalism that has become the dominant force in our economies and societies. Or we can have democracy. But we can’t have both.”

It was interesting to hear Max Keiser at Kilkenny last week describing the routine and almost casual simplicity of the fraud which which seems to now be endemic in Wall Street. And how the lessons learned after the jailing of Bankers over the S&L scandal in the 1980s was to change the laws by deregulations so that after a much greater scandals in more recent times only Bernie Madoff ended up behind bars.

Iceland’s gross debt is about 120% of GDP – up from about 53% in 2007.

It incudes a provision of 20% for civil service pensions — just illustrates the level of larceny to the south!


If you have the experience of rustling upncash each month for a payroll, then you would surely appreciate that what could have been feasible in 2008 would have had a much bigger impact on what would be victims — private sector workers who survived the first wave of job losses.

@ All

One lesson is that a small country needs a lender of last resort and neighbours that would pony up some cash.

In Ireland, the whingers just see the negatives and recall when the Democracy Then movement vapourised, the fallback was to demand a referendum to show a bit of machismo to the Europeans.

Today’s Deloitte survey on Christmas spending, shows why the unemployed will not impinge on the comfortable status quo — how long this will last is another story.


That note lists Ireland as having financial assets worth €43bn at the end of 2010. That seems scarcely credible to me. Are they valuing our bank recapitalisations at cost rather than market value? If the government was to liquidate its financial assets today, would it get more than €10bn for them? There is the NPRF stub and the stakes in the banks. Anything else?


If you have the experience of rustling upncash each month for a payroll, then you would surely appreciate that what could have been feasible in 2008 would have had a much bigger impact on what would be victims — private sector workers who survived the first wave of job losses.

Mr. Hennigan, I don’t know whether you’ve actually ever rustled up a payroll or not, but if you’ve handled cash you will surely appreciate that it is made of paper; paper which the government can in fact print. There is absolutely no danger of our ATMs ever running dry as long as we have the ability to do so.

(However, your point about payroll brings to mind one of the results of Steve Keen’s models which is that the critical point in a credit bubble is reached when employers can no longer find cash to pay their workers.)

In fact at this point in the euro crisis, if the DoF isn’t actual printing rainy day punts then we should all be very, very worried.


Whilst I’ve respect for your views I too don’t see how they can net to 70% and I agree with Carson above.

Perhaps a list to audit would be useful.

As good a place as any to remind fans of Max and Stacy that this weeks offering is from Kilkenny. Nice touch of irony (for iconoclasts) in the screen wallpaper (is that what you call it?)

“This week Max Keiser and co-host Stacy Herbert discuss the Fed, the Treasury and the Holy Troika and whether or not the Pope should beatify Jon Corzine, the CEO of MF Global who “lost” hundreds of millions in client funds. In the second half of the show, Max Keiser interviews economist and professor Constantin Gurdgiev about Anglo Irish unsecured bondholders and the global debt crisis”

@ A-Mac

We have obligations to Eurozone states not to act unilaterally which could ultimately be bad for Irish economy through increasing contagion risk of CDS triggering in Italy and Spain and bring down the Euro in the process and we have obligations to the ECB not to burn bank bondholders because we owe them €150 billion odd in ECB lending which is keeping our bank machines working.

Meanwhile, the ECB are beholden to a singular mandate to maintain price stability and overarching mandate to preserve the strength of the Euro. If they allow us to burn, they believe Spanish, Italian and French banks will be more dependent upon them for their funding which they believe rightly or wrongly poses a threat to eurozone.

While it is completely immoral that we have to honour bondholders who invested in our failed financial institutions, we have other practical considerations that are not of our making.

Whether we like it or not this is the reality upon which we are faced and I don’t think there is any elected politician in the country who, if Taoiseach or Minister for Finance would play poker with the ECB without any certainty that they would continue to provide us support and keep our banks functioning.

To do so would be reckless in the extreme and could cause more untold damage on our economy and on the social stability within the state. It’s very easy to talk about burning bondholders but faced with this economic reality, is there anyone who would honestly take such a massive risk as Taoiseach, Minister or Member of Government?

Come now John we expect much more detail from you, indeed rely on it. What’s your figure…if your taking data from secondary visual sources truly all our gods are dead!


“although media commentators and others in Ireland, out to sensationalise and earn celebrity status, rather than give accurate information, focus on gross public debt. Maybe Icelandic commentators are a bit more rational and give priority to accuracy rather than getting spots on the bill at comedy festivals.”

By “spots on the bill at comedy festivals” do you intend to refer to the performance of the entire Public Accounts Committee on the €3.6 billion last week?

@John Kennedy

Just a minor point or two John:

You refer to ‘our’ debt, ‘Our’ debt, “OUR” debt ….. which propagates the ‘Conflationist Fallacy’ ….

To be succinct, this is vichy_banking system/genuine sovereign debt. Irish citizenry has unquestionable obligations on the latter segment; as the opinion of the citizenry was not requested on the former, how an Irish Government or indeed an Irish Citizenry addresses the detritus from the odious former segment remains OPEN. Irish reputation demands that this distinction be maintained, and be made EXPLICIT in any substantive discourse.

Another minor point: due to dictates of key figures within global/local political/financial system establishment, CDS are not to triggered. Two norms of what used to be known as ‘capitalism’ have been breached, democracy and the rule of contract law have been ignored, and the upper_echelon losses have been socialized on the lumpen element of the citizenry. In a democratic society one would expect some challenges to such blatant dictatorial thievery and possible criminality – hence the question of how to address vichy_banking system debt remains OPEN.


Fair enough but you’ll no doubt note that this is an OECD projection and estimate. I’m not entirely sure how the’ve extrated the numbers and if the periods are in fact comparable nevertheless my basic logic would suggest that the OECDs estimate of Govt owned assets of any hew are overtstated given the dismal estimates suggested for the likely disposal proceeds from any sell off in publicaly owned businessess such as the ESB.

The wider point of course is that the medias focus has almost exclusively being on the Govts finances – as doom merchants such as Kelly, Prof. Gurdgiev etc have being pointing out – correctly in my view – the bigger issue here is not the Govts weak finacial position but in fact the dire position of many thousand of households and non financial sectors industries in the economy.

On a Gross basis the debt for all these sectors in Ireland is light years ahead of the posse. You may argue that on a net basis the figures may in fact look a lot more optimistic. I disagree primarily on the back of the fact that the ‘asset’ in a huge proportion of this gross/debt analysis tends to be a property of some colour.

I’ve suggested here before that on a net yield basis peak to trough falls in Irish resi property will be north of 66% – 66% being the minumum fall when the dust settles – and yes I fundamentally disagree with the PCAR figures in this regard as they make absolutely no reference to either mean reversion or rental yields in their 31.03.2011 document – which seems utterly crazy but is in fact the truth if you take time to read the document.

So the problem with working on a net basis is that you run into the sticky problem of asset valuation and the difficulty in finding buyers for same when the time comes. All they while of course the debt interest clock is ticking and costing vast sums of money – none of which requires a valuation opinion or where a liquidity issue arises – debt is there like a large dung heap in the corner growing all the while as households and businesses lose the will and the wherewithall to service same.

So whilst you may take some comfort in the knowledge that when push comes to shove there is an asset sale to offset the debt mountain I’m a lot more sceptical and assume the worst given the falls still likely in the Irish property market.


… final minor point:

‘… is there anyone who would honestly take such a massive risk as Taoiseach, Minister or Member of Government?

September 2008?

ECB: Lookit, ye pay off the bank bonds, in their entireity and with their full ‘coupon’ also paid, should come to about €100bn after interest is added (perhaps a few billion more, but who’s counting at that stage), we’ll loan ye the €45bn or so ye’ll need over the next four years – plus interest – and we’ll continue the current loan of about €100bn (with interest, albeit lower rate) to your Central Bank. So, the final cost to you will be – let’s see now, the interest on the deficit-closing loans, the interest on the Central Bank loan, and oh yes, that other €100bn. A good deal for ye, yes?

If ye DON’T pay the bank bonds we’ll pull the rug from under ye, cut ye loose, just like we did in Greece…

@ David O’Donnell

I take your point on the second message, in fact I was going to mention it. However we still don’t know who pushed whom into the bank guarantee but it cannot be denied that for better or worse, subsequent to the bank guarantee the policy adopted by the ECB has been that all debt sub, senior or sovereign must be honored and in effect guaranteed.

A lot is made of the disaster the guarantee has been but we now have unguaranteed senior bank debt which is susceptible to facing debt write downs without reneging on sovereign obligations and we are still unable to write down this debt.

So while one theory is that Cowen and Lenihan threw the dice, which is plausible, an opposing theory is that they made this decision with the support and even pressure of the European Central Bank.

The substantive effect of the decision was that international bond markets lost faith in the sovereign but the banking difficulties existed whether their liabilities were guaranteed or not and would ultimately have been found out.

The substantive risk which Lenihan/Cowen took onthat fateful night does not remotely compare to a potential risk by Noonan/Kenny which could effectively write off people’s deposits over night and see our sovereign funding been written off and been thrown to the wall by Europe.

On your first message, the principles are sound but it is my view that the Minister for Finance and the government has a responsibility to maintain social order and provide as much as is possible a functioning economy where everyone has the capacity to work and live. This trumps all and we have to be realistic of what real choices are available within the confines of ensuring that social order is maintained.

There are real substantive elements to our debt burden which can be achieved with continued negotiation and they all primarily revolve around promissory note payments. If this structure can be altered such that we no longer are obligated to pay our close to €4 billion from the exchequer every March for next 7 years or so plus interest, debt sustainability is a much more realistic prospect.

The only real choice any Minister or Taoiseach has in Ireland at present is to attempt to improve revenue, cut spending, attract foreign investment, improve bank lending and meet every single target demanded upon us by our European owners. It’s not fair but its not undemocratic, this is what the people voted for. People want stability and certainty more than anything and until the ECB cut us some slack, we have to power on and continue to boost our standing in international markets and hope that EU leaders can contain the crisis from Italy, Spain and beyond.

If you have an alternative blueprint please do tell.

@John Kennedy

No blueprint – simply striving for realistic description of the situation – and keeping options for action on behalf of citizenry open.

‘Democracies have the right to protect their social arrangements, and when this right clashes with the requirements of the global economy, it is the latter that should give way.’

@Diarmuid O’Flynn

Keep up the good work. Blind Biddy is very impressed – you will recognise her as the lady with the big white bazooka passing by on her tank some Sunday morning.

Seriously, I’m at a loss to understand the basic economic logic at play here; we’re taking on a debt of €72bn which, by the time we’ve paid the interest will be at least €100bn, because we’re afraid if we don’t the ECB will pull their €100bn of loans to the Central Bank, loans that are doing what, exactly, for us at the moment? Because that money is certainly not circulating among the hard-pressed businesses.

Does this make any economic sense? Am I missing something?

@Diarmuid O’Flynn

Good to see you on the blog. To borrow a sporting analogy, an area where you have developed some serious expertise, the Game is Fixed – the driver is dubious EZ politics – the era of ‘economic logic’ appears to be history. Not all that different from the era of rack-rent landlordism in North Cork in the early 19th Century where you might find some parallels; and North Cork still exists ….

Global Debt Crisis

The greatest private fraud of human history.
Who are the great fraudsters who are becoming the murderers of the human kind? How does the economy “illness” threaten Democracy and the freedom of people?
By knowing what happened in indebted Greece, where loan sharks created “bubbles” and the current inhuman debt, one can understand the inhuman plan in total …understand where this plan started just to bring all states at the same end …understand how this type of plans are established…


Comments are closed.