Ireland and Iceland: One Letter, Six Months, Three Years On

Reading Paul Krugman’s recent posts (here and here) reminded me that I forgot to write a post about my recent trip to Iceland. I presented at a very interesting conference on sovereign debt organised by Reykjavik University. Here is a link to slides and papers, which were presented on October 7 and 8.

My presentation was titled “One Letter and Six Months? Ireland and Iceland Three Years On”–the slides are here. One issue I discussed was whether Euro membership ultimately helped or hurt Ireland.

Much of the discussion surrounding Iceland in 2008 focused on the fact that they were outside the Eurozone and so could not obtain liquidity support from the ECB. While this was viewed as a negative factor, one could argue today that the (enforced) Icelandic approach avoided the mistakes associated with confusing a solvency crisis with a liquidity crisis. My conclusion: Without a clear policy on bank resolution, the Eurozone is not a good place to have a systemic banking crisis.

The Latest from Iceland!

The Icesave talks have collapsed (Update: Elaine Byrne is right. They didn’t collapse, they just didn’t come to an agreement prior to the referendum.)  Most likely, negotiations will resume after the referendum gets a resounding no. More positively, Iceland’s economy grew by 3.3% in the last quarter of 2009. This is good news. If indeed it is the case that the difference between Ireland and Iceland is one letter and six months, then we should see an economic recovery here during the summer.

Slide 11

Sarah Carey’s column in today’s Irish Times does a good job of introducing the public to the Department of Finance’s thinking about the banks as articulated in Slide 11 of the slides from the Minister’s presentation last week. However, I think it will take a lot more than a few op-ed columns to slay the beast that is the Iceland! talking point.

As an aside, for those who can’t get enough of the Iceland!ic banking crisis, here are two reports co-authored by eminent economists written prior to the crisis endorsing Iceland’s fabulous banks. Here‘s one from 2006 co-authored by Columbia University’s Rick Mishkin, a former Fed Governor (Best section – “Could Bank Refinancing Be a Problem?”). And here‘s one from 2007 co-authored by Richard Portes of the London Business School. (Best section – “The banks:successful and resilient”.)

As another aside, I note that some people were poking fun at the slides. However, it is very unusual for a politician to usual visual aids like this to illustrate their arguments and, based on my observation of his talk at the McGill Summer School, Minister Lenihan uses this material very effectively. So politicians using slides is a good thing: Don’t encourage those who’d recommend the minister keep his head down and deliver a monologue without charts and tables!

Iceland! Iceland! Collapse! Collapse!

I’ve noted on a number of occasions that both Brian Lenihan and Brian Cowen are very fond of misleading analogies in which any proposals to nationalise the two main Irish banks are linked to events in Iceland. For example, I noted recently that in an interview with Business and Finance, Minister Lenihan linked Iceland’s banking system collapse to a decision to nationalise. Some of the Minister’s bigger fans on this site argued that he was merely citing the sequence of events rather than indicating any actual causation.

Well, on this evening’s edition of The Last Word on Today FM, Minister Lenihan was at it again (podcast here — the interview is during the first hour of the show). In addition, as is usually the case when Lenihan and Cowen discuss this issue, the principal point of the discussion appeared to be to link the Labour Party’s position on the banking crisis to that of the Icelandic government. About 53 minutes in, the Minister said:

We didn’t go off, again like Iceland, and nationalise the system overnight because that lead to a banking collapse in Iceland. That’s what some of the Labour Party people wanted us to do in the last year.

(Cue philosophical debates in the comments about the meaning of the word “because” or perhaps “lead”).

Continue reading “Iceland! Iceland! Collapse! Collapse!”

Macroeconomic Adjustment: The Second Phase

Robert Wade has an interesting piece on Iceland in today’s FT: you can read it here.  The main point he makes is that some of the assistance measures adopted last year are due to expire soon: much of the pain of the crisis was delayed rather than eliminated by these measures.  Accordingly, the full impact of the crisis on Icelandic living standards has yet to kick in.