The financial crisis in Iceland and Ireland – what are the lessons five years later?

The speech by Mar Gudmundsson is here.

61 replies on “The financial crisis in Iceland and Ireland – what are the lessons five years later?”

First, dealing with failing big banks in small countries: Guaranteeing the entire banking system in Iceland’s case would probably have resulted in sovereign default and the bankruptcy of the country. In general, taking such a step with big banks in small countries is risky, especially if a significant part of their balance sheets are in foreign currencies. The alternative is to save only key infrastructure elements, such as the domestic payment system.

He’s too polite to say it, but of course Ireland’s banks’ balance sheets were in a foreign currency i.e. a currency over which the domestic authorities had no control, the euro.

“The idea of building international financial centres in countries like Iceland and Ireland is dead – for the
time being, at least – as it is not safe under the current framework.”

There goes Luxembourg, Malta, Cyprus, Greece, Lichtenstein, Jersey, Isle of man, Singapore, Panama and many others.

Growing a pair would seem to be useful also. See W Buiter, esq, on what the gov should do (be stroppy) until we get our money back. Of course, the irish bond vigilantes, as represented by the Man from Danske, tut tut that…

Its in the same paper as Mr Noonan gladhandling, geegawing and smiling at the markets as he notes that even if we sell the AIB hoard we might still get retrospective recap. I guess anything is possible…

What charge D? Hes noted its OUR government that needs to look out for OUR people. Do you find that too complex?

From Brian’s link

“Asked whether the plan to sell the Government’s holding would preclude retroactive direct recapitalisation from the ESM fund, Mr Noonan replied that it wouldn’t, pointing out commitments had already been made about the retroactive recapitalisation of Irish banks.”

Would anyone care to remind us what commitments have been made about retroactive recap of Irish banks?

(That’s a real question btw not sarcasm)

@ BL

Not a bit! Foolish negotiating advice from persons – however eminent – with no skin in the game simply prompts my rather obvious question. Indeed, the lack of any political nous whatsoever among many of those offering the advice is little short of astounding.

“If a euro-zone government can’t deliver assistance to a bank that requests it, “then the ESM can step in with a banking program or direct recap of banks,” Dijsselbloem said today in Davos, Switzerland. “That instrument we will finalize in March, so that will also be available on strict conditions on the outcome of the asset-quality review” by the ECB.
A long-running debate over backstops has direct implications for the success of the ECB’s Comprehensive Assessment of the largest euro-zone lenders, which it will begin to supervise in November. German Finance Minister Wolfgang Schaeuble has warned that allowing the ESM to aid banks directly would require changes to German law.”

@ jg

It is a fascinating political situation. Schaeuble has to balance the domestic political debate in the lead-in to the European elections, with the need to get the European Parliament to endorse the banking resolution deal while looking over his shoulder as to what the constitutional court might get up to.,1472780,26003288.html

One thing is, however, already clear; the SPD in government with the CDU makes for quite a different situation to that which prevailed relative to the FPD (still languishing at 3% in the polls) when it was in that position. The simplistic pedagogical style of Merkel has had its day.

@DOCM,from your link,direct almost from Davos,he can’t seriously hope to drive irish yields lower via US investors ?
Who was not in Davos that justifies a 3 day holiday in January in New York?
Every January Davy’s holds a equity conf. here,probably just a coincidence..
Regarding recap,please it’s disingenuous at this stage giving the employes,shareholders false hope get on with running it,prep it for sale.

“Mr Noonan travels to New York today to meet investors in Government bonds, after a similar trip to London in December.
The post-bailout trip aims to “continue to encourage American investors to buy Irish bonds as they’re doing already”, the Minister said, highlighting that a number of events had taken place since his last US trip, including the Moody’s upgrade. “We’ve a good story to tell.”
Around 25-30 investors are expected at a lunch hosted by the National Treasury Management Agency in New York.”

Says it all,he who has the gold makes the rules….
“German Finance Minister Wolfgang Schaeuble gave the idea a cool response.”


Indeed, the lack of any political nous whatsoever among many of those offering the advice is little short of astounding.

I am not sure you are qualified to use the words “political nous”. As someone who has never offered any advice for Ireland other than “Do what you are told!” it is a bit rich.

Anyway, do carry on and on and on – 5 out of 12 posts so far. The issues of the financial sector seem to provoke you to talk about everything else.

I wonder why?

The EM markets are trina cheile again.

Lesson from Ireland, Iceland and EM is that mobile capital doesn’t care about anything other than yield and when TSHTF, capital security.
Most of the galacticos just follow the herd, they don’t look under the bonnet and they assume they’ll be bailed out if it goes wrong.
“The freedom to be as avaricious as possible within the law keeps companies hard, fast and efficient, which is how we like them.”

That is the Lex view

The question is how long that meme is valid for.


Waddya make of those UK GDP figures? Luvvly jubbly! Maybe some of their magic dust will rub off on our young emigrants and they can come back and shake up this old kleptocracy. Bit of efficiency would do wonders for the charity/health sectors.


That is the Lex view.

Of course the Lex column ignores that companies have agency themselves with regard to the creation of law through lobbying, the revolving door[1] and, with international capital, the ability to play states against each other for the most lax regulatory regime and lowest tax rates.

So companies keep just barely within the bounds of the law they help to set while trying to transfer costs to their employees (long commutes to industrial estates), risks to the state (a la the financial sector) and avoiding taxes through elaborate corporate structures (the Vodafone high interest loan to a foreign subsidiary you mentioned was a beauty).

[1] Mario Draghi is ex Goldman Sachs, Mario Monti has done work for them too. Our own John Bruton was working for the banks while exhorting us to tighten our belts so they could be made whole. The pernicious influence of the financial sector is everywhere.

Pete Seeger has died.

I have the photo in front of me, the two of us standing together at the street in front of the Poughkeepsie Galleria Mall, opposing the Iraq war, when that was not exactly popular.

@ jg

There is a difference between a “cool response” and a blunt “Nein”! What can possibly be wrong with getting the banks to stand on their own two feet as early as possible? After all, this is the supposed German credo across all strands of political opinion.


That UK thing is based on debt because productivity is going nowhere and consumption growth is driven by either debt or salary increases.

I posted on it yesterday but am happy to redo it if you want.
Tull must have been working off a bad feed of pints 😉

It appears that Carney is not able to keep the ball kicked out and may have to replace at least one of his midfielders.

There are 2 schools of thought :

1. I believe in miracles

2 I don’t, I don’t, I’m sorry

@ jg

francis does not have a high opinion of DWN but in this instance it would be difficult to disagree with its view that this is just another “election gag” by Schaeuble.

Herewith an interview with one of the SPD new brooms (or, rather, an old and experienced one) in today’s Guardian.

Especially, this bit!

“Through the European Union, we have found a way to resolve our differences peacefully. Instead of the law of the strong, Europe is governed by the strength of the law.”

Maybe Germany may eventually actually recognise this by (i) stopping her insistence on extra-EU law intergovernmental arrangements in relation to the euro and (ii) her constitutional court also making a contribution by finally recognising, as all other constitutional courts have done, the sole right of the ECJ to review the validity of the acts of the EU.

@DOCM, Brian L

Is that really the extent of the “commitments already been made about the retroactive recapitalisation of Irish banks” that Noonan is referring to?

I linked to that very document on here a few weeks ago. This was from RTE quoting the Irish government view:

“The framework agreement also specifically stated that “retroactive” recapitalisation could be a possibility “on a case-by-case basis”, sources say.

Sources also point out that such a move could be done under Article 19 of the ESM treaty, and that therefore the ESM’s charter would not have to be changed, although it would have to win the unanimous support of all 18 eurozone countries, including the approval of five eurozone parliaments.”

A grumpy analysis might be:

Article 19 allows Articles 14 – 18 to be altered. That means the facility contained therein to lend money to a state so it can recap its banks could, theoretically, be altered to allow the ESM to directly recap a bank. That’s true. Its effectively been done to allow in principle, future direct recaps, see:

Journalists should read the whole document, but here are extracts:

“Following the 29 June 2012 statement by the Heads of State or Government of the euro area reaffirming the need to break the vicious loop between banks and sovereigns, the Eurogroup has worked intensively on the operational framework of the future ESM direct recapitalisation instrument. The main features of the instrument are now agreed in view of having the instrument
operational once an effective Single Supervisory Mechanism is established….

…To ensure the most efficient use of ESM resources, the ESM will assist to directly recapitalise only those institutions whose viability can be secured through a capital injection and restructuring plan. [ie forget about IBRC]…

A robust valuation
Before any final decision to grant financial assistance and capital injection, a thorough due diligence and rigorous economic valuation, based on a sufficiently prudent scenario…

…It is imperative that the ESM safeguards its resources…”

Article 19 itself does not allow Article 20 to be altered, but Article 20 specifically allows the Board to do so. So theoretically still a go for retroactive recap.

Pricing policy
1. When granting stability support, the ESM shall aim to fully cover its financing and operating costs and shall include an appropriate margin.
2. For all financial assistance instruments, pricing shall be detailed in a pricing guideline, which shall be adopted by the Board of Governors.
3. The pricing policy may be reviewed by the Board of Governors.”

But note:


Investment policy

1. The Managing Director shall implement a prudent investment policy for the ESM, so as to ensure its highest creditworthiness, in accordance with guidelines to be adopted and reviewed regularly by the Board of Directors. The ESM shall be entitled to use part of the return on its investment portfolio to cover its operating and administrative costs.

2. The operations of the ESM shall comply with the principles of sound financial and risk management.”

So the price paid for Irish bank shares in an ESM retroactive recap would have to be “prudent” and not negatively affect its creditworthiness. The board can set guidelines, but there is a strong implication that those guidelines must be consistent with prudence.

Also 2) appears to specifically require that any retroactive recap “shall comply with the principles of sound financial and risk management”.

This seems to be at odds with the idea of deliberately buying shares in an Irish bank at a price which is way above fair value – which, from the Irish perspective, would be the whole point of the exercise.

Whatever about getting all the ESM states to agree to use Article 19 to insert the theoretical capacity to retroactively recap, getting agreement to do so either in bankrupt IBRC or on a clearly uneconomic basis in the other banks, would seem to be something else.

The Irish government does not yet seem to have convinced the other ESM contributors that they forced Ireland to act against its own interest and should use the ESM to apologise.


Speaking of political nous, this from the current non spineless Icelandic prime minister.“>Let Banks Fail Is Iceland Mantra as 2% Joblessness in Sight

Of creditor claims against the banks, Gunnlaugsson says “this is not public debt and never will be.” He says his main goal while in office is “to rebuild the Icelandic welfare state.”

4% unemployment and the banks can go to hell.

How do you like them apples?

Lets try that again.


Speaking of political nous, this from the current non spineless Icelandic prime minister.

Let Banks Fail Is Iceland Mantra as 2% Joblessness in Sight

Of creditor claims against the banks, Gunnlaugsson says “this is not public debt and never will be.” He says his main goal while in office is “to rebuild the Icelandic welfare state.”

4% unemployment and the banks can go to hell, and this is from a centrist.

How do you like them apples?

On Iceland, nothing really new here – the two economies haven’t much in common and while many Icelanders had foreign currency mortgages at the time of the bust, the fall in ECB rates was a boon to many Irish borrowers.

On Noonan and bank debt refunds, never underestimate the appetite for bullshit.

He of course knows that the claim that commitments were made is an exaggeration at best.

Has any clued-in journalist pressed him to name the people who made the commitments?

Never mind, the naifs are impressed that on the one hand, he is accepting plaudits for a superb job well done while on the other hand he is waving the begging bowl to impress the domestic audience.

Willem Buiter from the bailed-out Citigroup suggests that Ireland should get tough. Things get done faster in the US and wonder how easy it was after the merger of Citi and Travellers for Sandy Weill to have the depression-era Glass-Steagall Act repealed. 😕


“SPD new brooms”

The brooms are all made in the same thought factory.

Die alte Klassiker sind die Besten

“Griechischer Restrukturierung”, “Ein Bett im Geldfeld”, “Es gehört alles zu meinem Bank”, “Wann wird’s mal wieder permagrowth”

@DOCM,first thing here just having bit fun but WTF!!!
“in addition, the monthly report discusses the pros and cons of a one-time tax on private assets to reduce public debt levels in the countries most severely affected by the crisis. From the perspective of the Bundesbank, such a levy should only be considered in extreme cases of threat of sovereign default into consideration (see right).”

h/t FT

“The Irish government does not yet seem to have convinced the other ESM contributors that they forced Ireland to act against its own interest and should use the ESM to apologise.”

Why can’t you just sing along with the mood music like everyone else ?

This ongoing pseudo debate about bondholders and retrospective bank recapitalisation is turning into a classic Irish morality play, where, just like abortion, a discourse continues that bears little or no relation to the reality of the situation, but allows many people to pontificate and feel good about themselves.

The mundane facts are that 64 billion euro was used to capitalise the banks. The (relatively) small amount that went to Bank of Ireland has been or will be repaid at a profit to the Exchequer.

Some of what went to AIB may be repaid, but in any case was essential to prevent the collapse of a ‘systemically-important’ bank. In other words, there was no question of burning the bondholders in either of these institutions.

The 34 billion that went into Anglo could perhaps not have been given to that monstrously badly managed bank. But, we should recall that its shareholders were wiped out, and certain classes of subordinated bondholders were also burned. The money Anglo did receive of course repaid depositors as well as senior bondholders.

How much was paid to senior unsecured bondholders? About 10 or 11 billion. This is the amount that the Government could argue that the ESM should contribute to. But presumably, that would also leave Ireland liable to pay its share of any re-caps of other European banks? In any case, the amount has to be set against our General Govt Debt of c 220 billion, and the very favourable terms we enjoyed (eventually) under the Programme, and in terms of ECB lending to Irish banks.

oh well back things are almost to normal,ehm why does the minister of finance feel such a need to attend a boondoggle organized by the ‘ireland’ fund here in new york?
if the govy jet is/was to be utilized would the minister for health not be a more informed guest,or is crumlin hospital part of the very well travelled Noonan’s brief now…..shameless absolute complete waste time and money…—Dinner-in-support-of-Childrens-Medical-Research-2014

” Minister Noonan will also give the keynote speech at the annual Children’s Medical & Research Foundation (Crumlin Hospital) US gala fundraiser and speak at a Villanova University Pennsylvania Alumni event.”

2 Johnny F

“Scratch beneath the surface, however, and Britain’s deepest economic challenge just got deeper.
The problem is that the trend the Bank of England, the Treasury and economists want to see most – an end to productivity stagnation – appears to be absent. In the latest labour market figures, for the slightly different September to November period, total hours worked grew 1.1 per cent, indicating that output per hour worked fell again in the final quarter.
Unless Britain’s productivity performance improves, the economy can catch up its lost ground with people working longer and unemployment falling. But once this is done, prosperity will stagnate, as it has for the past six years.”

Johnny, we’re sorry
We’re worried


After I bitched here significantly about the DWN, I also took a harder look at German media like, Handelsblatt, and found that making cases, I find obviously ridiculous, is much more common than I was aware of.

The photo I have in front of me, was actually taken at a point, when I didn’t know that the old man is Pete Seeger, and was somewhat surprised, why the other guy was actively offering to make the picture.

It was freezing cold, and I was on my way to get a German Flag, and then thought, if this old guy can stand there at those temperatures, I can too, show my face to the neighbors and colleagues, and what I stand for.

I went to NYC the next day, the only day in my whole life I carried a big German Flag (well, 2 x 3 feet size, I found it and have it on next to my desk) at an anti-war demonstration, my first since 14 years.

When I look at Steinmeiers piece in the guardian and Joschka Fischer throwing his “I am not convinced ….., In a democracy you have to make the case” at Rumsfeld

I see actually great consistency and national consensus on what we do and what we NOT do.

I had taped, watched and analyzed the Colin Powell speech at the UN (5.2.2003) and found 7 of the 8 war arguments to be blatantly false. The 8th, the surface finishing specifications for the aluminum tubes, I needed to check with my mechanical engineering buddies.

On that day, some trust in an ally, I had, broke.

We will all wait and see what the Bundesgerichtshof, the German supreme court, the ONLY relevant body to rule on the German constitution, finds.

As far as I remember the ECJ used the words “strict conditionality” about a dozen times in his Pringle Case ruling.

@ seafoid

Nice “Fine young cannibal” quote. Makes me re-watching “Eat the rich” tonight : – )

@ John Gallaher

On the buba link you gave, there is also a link to a musing about a one-off property tax, to cut government debt down to reasonable levels, a measure that was part of the election programs of the left 50-x% of the german spectra. In the “startpageAreaId=Teaserbereich” ;- ) ROFL

I don’t see this so far that much discussed in non-German media, beyond one in the FT.

Apparently the C-bank got it on the wrong foot with their shorts on periphery yield spreads. So now they trot out their court yester (a.k.a. chief economist) Buiter trying to talk them up a little bit.

Looking for the usual suspects at, I see Wyplosz and Blanchard so far. Where are Soros and de Grauwe, when they need them? Are we sick, as Malcolm X used to say? : – )

At least Buiter is suggesting an actionable point (deliverable). However, Ireland still very much needs the generosity of “strangers”. Unless it is in the strangers’ interests, why should they play ball with Ireland?

@ JG
Clearly the US is the largest source of FDI for Ireland, so MN and the Irish in general should try to boost investment. The Irish tax incentive is one thing, but that matters relatively little outside of MNC investors; to e.g. PE players. How would you encourage greater investment from the yanks? If you were in MN’s shoes, why should US investment (PE and MNC) locate to Ireland rather than elsewhere? Not so easy to answer that without the tax rate or “scabby” selling prices (crystalizing Irish capital losses). How does Ireland get much more of an allocation of that possible-for-Ireland money on the sidelines?


“people vote for the party that sorts out the economy. Expect the same over here: FG/Lab coalition till 2020.”

Glad to hear “we’re sorted”…i’m pretty sure even the morons in FF could have stuck to what the troika told them to do…lets face it, they had form in that regard. Ireland’s economy and reputation restored by a government who could make no sovereign decisions in any event – sorted indeed – debt to GDP continues to worsen…no growth, unemployment down slightly due to emmigration, disposable income declining….but I will grant consumer sentiment up…the spin has landed in the short term.

… row in with a lot of the music theme from above and to celebrate being “sorted”

….”you spin me right round baby right round….”

Results matter – Osborne loves all this because he knows the news is only going to get better for the UK. Only in the mad world of economics can a serial loser like Summers, rubbish at everything he has ever done, still hog the limelight and be taken as a serious commentator.

Larry Summers was central to causing the financial crisis in the first place, he was Treasury Secretary at the height of the credit derivative insanity and he constantly pushed the line that there was nothing to worry about. That is his legacy. Osborne’s legacy so far is record employment, a much improved debt profile and the fastest growing economy in Europe.

Summers has some cheek criticising the guy who comes along trying to clean up his mess.

@ francis

No one is questioning the right of the German constitutional court to rule on the German constitution. What is being questioned is the right it appears to assume to rule on matters of EU law, notably actions by the institutions of the EU. It has never referred, unlike lower courts in Germany, a point to the ECJ as the Irish supreme court did in the Pringle case (and as have such courts across the EU).

On the conditionality aspect, you are correct, as this blog post confirms.

@francis didn’t catch the property tax proposal but did read the bit bout the italians..
oh heres a few emails from himself:)

@JF larry is almost too successful,hence the choke,his rather large private sector renumeration was gonna be a issue.

“Making an impassioned social commentary that seemed to cut against fellow Democrats, Larry Summers said that making people poorer, “even the very rich,” in the name of balancing the scales of income inequality in America is a destructive course of action.

“America succeeds by raising everybody up. It doesn’t succeed by tearing anybody down,” the former Obama economic adviser and Clinton Treasury secretary told CNBC’s “Squawk Box” on Thursday at the World Economic Forum in Davos, Switzerland. “The rhetoric of envy and the rhetoric of tearing down, I don’t think, is the right rhetoric for America’s leaders.”

“I think it’s important to do something about [income] inequality,” Summers said, but he argued that it’s much easier to allocate a larger pie to those who are left behind than a “stagnant pie.”

America succeeds by raising everyone up. Not since morning in America. Look at the stats. That is not Koch bros style Walmart made it. I think there is a reasonable chance of an anti plutocrat mood developing and that it may come with some blue collar antisemitism the way things are going.

@ grumpy,

now it is also our cows, who can blow out the roof !

@ john g,

the buba post is in a certain way really remarkable, truly teaser terrority. During the Cyprus standoff last year, apparently the Target 2 lines were not closed, and somebody compared that to dynamite fishing, throw a hand grenade into the pond and see what is popping up, where does the hot money go

I like the the buiter /mees upate : – )
I also noted that he is now just “economist”, without the “chief”

I am just on a food break from “eat the rich”, which also has an interesting link to your Cluedo : -)

beyond that, defenestration season seems to start early this year, yesterday the TaTa guy in Bangkok, today the JPM guy in London, who is next ?

Hi francis,yes if you come across an english translation please post a link,but looked to me like the FT had quite good summary.
The buiter link was a bit of a cheap shot by me,but hes rather fond off the limelight so fair game.
Indeed,i think a DB chap found Sunday too in London,significant job losses ahead in NY specifically I bankers.
heading out and will watch ‘state the union’,last year POTUS requested congress pass 41 measures/laws…2 got passed:)
miles miles off topic kinda a FYI,but tomorrow NI holding what the Irl cant or wont…

bit background to ‘irl’ here …

@seafoid,oh its awful,much much worse than that,hard to get the energy get up most days,to paraphrase chuck price the music is playing:)
heading out,state of the union on a bit later,will be here tomorrow.


Anti plutocracy complete with anti Semitism…is that a prediction or a wish?
Would you settle for the former and not the latter.

I think the dynamics are awful, Tull. Obviously it would be lovely if the next 50 years were like the last 50 but I doubt it. And plutocracy eats its future. Did you ever see that book on abandoned Irish mansions? An awful lot of good stuff went in the great clearout. The non linear stuff is not easy to model.


But the twin disputes over Icesave and the failed banks have soured Iceland’s international image, leaving it cut off from capital markets, unlike fellow crisis countries such as Ireland and Spain. Iceland also still has capital controls and is unlikely to be able to remove them until it resolves the issue of the creditor claims in Kaupthing, Glitnir and Landsbanki, its three failed banks.

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