How Iceland Recovered...

Generali

...from its near death experience.

http://blog-imfdirect.imf.org/2011/10/26/how-iceland-recovered-from-its-near-death-experience/

A short piece from the IMF.

When I traveled to Reykjavik in October 2008 to offer the IMF’s assistance, the situation there was critical. The country’s three main banks—which made up almost the entire financial system—had just collapsed within a week of each other. The sense of fear and shock were palpable—few, if any, countries had ever experienced such a catastrophic economic crash.

There was a lot of concern that a disorderly depreciation of the exchange rate would be ruinous for households and companies if nothing was done or that deposit runs would cripple what was left of the financial system. The scale of the uncertainty was staggering―the three banks had assets worth more than 1,000 percent of GDP, and no one knew at that point how large the losses would turn out to be and how they would be divided between Icelanders and foreigners.


Today, three years later, it is worth reflecting on how far Iceland―a country of just 320,000 people―has come since those dark days back in 2008. Growth has returned to the economy, and new jobs are being created: unemployment, although still unacceptably high for a country used to near-full employment, has dropped below 7 percent of the work force. In June this year, the government successfully issued a $1 billion sovereign bond, marking a return to international financial markets.


And while public debt, currently at around 100 percent of GDP, is much higher than before the crisis, an impressive consolidation program has put the country’s finances back on a sustainable path during the past couple of years. As for the banks, they have been shrunk to about 200 percent of GDP, and are now fully recapitalized.
There are, of course, still many unresolved issues, including the vexed Icesave case involving disputed liability for lost deposits in the U.K. and the Netherlands, but Icelanders have shown their resilience and their strength as a people. They took control of their destiny and implemented some very tough policies that are now bearing fruit. But the work is not finished, and additional efforts are needed to reduce unemployment and boost growth.

Picking up the pieces
So how did Iceland put its economy back together? The program we ended up agreeing in record-time with the Icelandic authorities had four important elements.

• First, a team of lawyers was put to work to ensure that losses in the banks were not absorbed by the public sector. In the end, the public sector did of course have to step in and ensure the new banks had adequate capital, but it was insulated from vast private sector losses. This was a major achievement.
• Second, the initial focus of the program was exclusively on stabilizing the exchange rate. Here, we reached for unconventional measures, notably capital controls.
• Third, automatic stabilizers were allowed to operate in full during the first year of the program—effectively delaying fiscal adjustment. This helped support the economy at a time of severe strain.
• Fourth, conditionality was streamlined and focused on the key issue at hand—rebuilding the financial sector. While there are some issues in the broader economy where reforms will eventually be needed, these were not a part of the program.

The bit I find interesting (given that economic recovery in Iceland has come much faster than in the rest of Europe) is this:

So how did Iceland put its economy back together? The program we ended up agreeing in record-time with the Icelandic authorities had four important elements.

• First, a team of lawyers was put to work to ensure that losses in the banks were not absorbed by the public sector. In the end, the public sector did of course have to step in and ensure the new banks had adequate capital, but it was insulated from vast private sector losses. This was a major achievement.

Everyone else in Europe is in all sorts of bother and is trying to bail out their banks. That's the route to contagion. Iceland is getting back on her feet having told the lenders to the banking system that they had to take their losses on the chin.

Kennyboy66

or maybe not;

http://www.creditwritedowns.com/2011/10/was-the-imf-programme-in-iceland-successful.html

The size of Icelands economy is surely hugely relevant - this is a county roughly the size of Bradford or Cork in Ireland (the area not just the city) in population.

Reserves & shareholders of European banks could well afford Icelandic write offs because in the scale of things they are puny.

Unless savers are going to be wiped out then the same option isn't available for Greece, Ireland, Italy et al.

It just seems inconceivable to me that if savers lost everything, the european economy wouldn't suffer a catastrophic decline akin to the USA in the 1930's.

The other key difference is that the problems are already in the public sector (and for the likes of Italy and Greece this is nothing to do with previous bank bailouts).

I do think however the only solution for Greece is to leave the Euro.

Road_Hog

Let's get some facts right first, Iceland welshed on it's debt, it owed other countries money and those people in those other countries were members of the public. If you do that, you should become an international pariah and be eternally shunned.

On the flip side, they told the IMF and Rothschild bankers to get stuffed and are all the better for it.

CLAPTON

Road_Hog wrote: »

Let's get some facts right first, Iceland welshed on it's debt, it owed other countries money and those people in those other countries were members of the public. If you do that, you should become an international pariah and be eternally shunned.

On the flip side, they told the IMF and Rothschild bankers to get stuffed and are all the better for it.

well, the Icelandic banks didn't pay their debts
are the Icelandic people responsible for the banks there?

Road_Hog

CLAPTON wrote: »

well, the Icelandic banks didn't pay their debts
are the Icelandic people responsible for the banks there?

Did the Icelandic people take the profit during the good times?

I seem to remember they had a fairly high standard of living.

Generali

Road_Hog wrote: »

Did the Icelandic people take the profit during the good times?

I seem to remember they had a fairly high standard of living.

Financial services was and is a tiny part of the Icelandic economy. They have a high standard of living because of the fishing and Aluminium smelting industries.

The trouble is everyone is crapping themselves about what happens if the banks go bust without thinking it through. All we're losing is a medium of exchange. A new one can be created easily enough. Nobody ploughed salt into the soil.

CLAPTON

Road_Hog wrote: »

Did the Icelandic people take the profit during the good times?

I seem to remember they had a fairly high standard of living.

in what sense did they 'take the profits' during the good times

in what sense did you 'take the profits' from the banking sector over the last 10 years here in the UK?

if a major UK company goes bankrupt today do you feel liable to repay their debts because you benefited from the profits in the good times?

Linton

CLAPTON wrote: »

in what sense did they 'take the profits' during the good times

in what sense did you 'take the profits' from the banking sector over the last 10 years here in the UK?

if a major UK company goes bankrupt today do you feel liable to repay their debts because you benefited from the profits in the good times?

Profits are taken from the finance sector by paying local executives high wages who spend them locally and by tax.

A major difference between Icelandic banks and UK ones is that the Icelandic ones gained almost all their income and profits from outside Iceland. In practice Iceland only guaranteed the deposits of the locals.

In this country guaranteeing the deposits of the locals (both individuals and companies) would be far more expensive. Presumably it is cheaper to guarantee the bank by loans that may never need to be called on than to repay all depositors.

Linton

Generali wrote: »

.....
The trouble is everyone is crapping themselves about what happens if the banks go bust without thinking it through. All we're losing is a medium of exchange. A new one can be created easily enough. Nobody ploughed salt into the soil.

I would be rather upset if my "medium of exchange" was lost!

Generali

Linton wrote: »

I would be rather upset if my "medium of exchange" was lost!

Why? If your boss started paying you in dollars rather than pounds and you could use that currency to pay for housing, food, fuel etc then what's the difference?

Ok, you might miss seeing a picture of the Queen each time you opened your wallet but dead Presidents would soon fill the gap.

Linton

Generali wrote: »

Why? If your boss started paying you in dollars rather than pounds and you could use that currency to pay for housing, food, fuel etc then what's the difference?

Ok, you might miss seeing a picture of the Queen each time you opened your wallet but dead Presidents would soon fill the gap.

I was more concerned about my savings, in whatever currency, and the savings of my employer (if I had one).