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Monday, January 27, 2014

Five Years After Iceland Let its Banks Fail: Very Low Unemployment

Posted by on Mon, Jan 27, 2014 at 8:13 AM

In 2008, Iceland, a $14 billion economy, decided to default on $85 billion of nonsense the banks dreamed up. What happened?

Now, the island is finding crisis-management decisions made half a decade ago have put it on a trajectory that’s turned 2 percent unemployment into a realistic goal.

While the euro area grapples with record joblessness, led by more than 25 percent in Greece and Spain, only about 4 percent of Iceland’s labor force is without work. Prime MinisterSigmundur D. Gunnlaugsson says even that’s too high.

“Politicians always have something to worry about,” the 38-year-old said in an interview last week. “We’d like to see unemployment going from where it’s now — around 4 percent — to under 2 percent, which may sound strange to most other western countries, but Icelanders aren’t accustomed to unemployment.”

The lesson in all of this is simply that the fear the banking industry pumps into the American system about how the world would surely end if they failed may be greatly exaggerated. Yes, for the US, the result of this form of creative destruction might not be as pretty as Iceland but it's also unlikely to be something like The Day After Tomorrow.


Comments (12) RSS

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Kris 1
No citation or link to the source article?
Posted by Kris on January 27, 2014 at 8:39 AM · Report this
Urgutha Forka 2
I believe the majority of people who lost the most when Iceland defaulted were Russian billionaires.

If true, I'm fine with that.

If American billionaires would be the losers if we let American banks and investment firms collapse, I'd be fine with that too.
Posted by Urgutha Forka on January 27, 2014 at 8:45 AM · Report this
Posted by rob! on January 27, 2014 at 8:52 AM · Report this
You know what else? Iceland has very high taxes, especially by American standards. Not included on the taxes page I've just linked are the import duties, in addition to the 25% VAT.

Import duties on finished goods are much higher than import duties on things needed to make finished goods. Lo and behold, stuff gets made in Iceland! Import duty on food, especially meat, is very high, which works quite well as a farm-price support program.

We were shocked by a couple things when we were there several years before the bank failures. Everything was super-expensive. Everything and everyone was nice and shiny and looked fairly comfortably well-off. The population looked rather young, with lots of small children evident everywhere. The entire country's population looked like a middle-class fantasy world. And all the taxis were Mercedes diesels.

Moral to be drawn from this:

High taxes do not hurt employment.
Cheap consumer crap does hurt employment.
High prices and high taxes don't seem to be a problem there. I'm guessing their wages are also high and they're not a bunch of whiny babies about the cost of living in their society.
If this is socialism/income-distribution/whatever, it works.
Posted by Brooklyn Reader on January 27, 2014 at 9:13 AM · Report this
Fnarf 5
@2, and millions of British and German small depositors, and pensioners, and universities, and charities. Iceland allowed its banking system to get out of control, which is ridiculous since Iceland -- population about the size of Greater Tacoma -- should barely even HAVE a banking system; but in Iceland a couple of random dudes could and did just announce one day that they were banks, and "loan" each other five billion euros, and lookie there, they each had five billion euros! Then they sold those investments with the promise of state backing, which was ridiculous, since the amounts held by the banks was many times the total wealth of the entire island. People got mad when Bernie Madoff ran his scheme, but for some reason plucky little Iceland gets off the hook.
Posted by Fnarf on January 27, 2014 at 9:19 AM · Report this
Can you really use an isolated island with a population half of Portland's as a comparative case study for the EU economy?
Posted by WFM on January 27, 2014 at 9:29 AM · Report this
You want an earful of misinformation and stupidity, just read a 'Iceland bank' post by a liberal:

From the FT, March 2013

Doubts cast on Icelandic crisis model

Gone to blazes: Icelandic protesters demonstrate outside the country’s parliament in 2010
To many outsiders, Iceland stands for the idea of dealing with a dramatic financial crisis by letting banks fail and then devaluing the currency. It even managed to convince the International Monetary Fund of the benefits of capital controls.
But increasingly Icelandic policy makers say much of that view of an “Icelandic model” for handling a financial collapse is a myth – even as it is invoked as a possible template for Cyprus’ international rescue.

“Is there an Icelandic model for dealing with failing banks? My conclusion is mostly no,” says Már Gudmundsson, the governor of Sedlabanki, the central bank. “There is a lot of misunderstanding about Iceland.”

The confusion comes because in the autumn of 2008 Iceland’s three largest banks – Kaupthing, Landsbanki and Glitnir, which together had assets 10 times the size of the country’s economy – were allowed to fail. Rather than bailing them out and protecting bondholders, as did countries such as Ireland, Iceland forced losses on to the bank’s creditors.

In the popular imagination – particularly in Ireland, Portugal and Spain – that means that the government avoided the bill for the financial implosion. But that is not true.

Iceland, in fact, spent more as a percentage of GDP than any other country apart from Ireland in rescuing its banks, according to the OECD.

More recently, two Icelandic experts have estimated that the crisis cost Icelandic taxpayers 20-25 per cent of GDP, principally because of a big loss in the value of collateral that the three collapsed banks had pledged to the central bank when the authorities were trying to do all they could to save them.

Mr Gudmundsson underlines that the domestic banking and payment system continued without interruption. The three banks “were more off-border than cross-border”, he points out, meaning that the economic consequences of the collapse of 90 per cent of the financial system were far less dramatic than they might otherwise have been.

“It is a myth that Iceland allowed banks to fail completely and that other countries could do the same without feeling consequences,” Mr Gudmundsson adds.

The issue of foreign creditors has not gone away either. Most of their claims are now owned by hedge funds, banks or restructuring specialists, opening them up to attack from the centre-right opposition who are threatening to pay them back very little. 
Another big debating point in the country is the merit or otherwise of having its own currency. Unlike eurozone countries, Iceland took much of its pain through the exchange rate rather than unemployment rate – the krona fell by more than 50 per cent against the euro.
But by boosting the cost of imported goods and thus consumer prices, the sinking currency has been a double-edged sword, as most Icelandic loans are linked to inflation.

The boost to exports from the falling currency has not been as great as many predicted, Mr Gudmundsson says. “The level [of the krona] does give stimulus to exports, that is absolutely true. But export growth has been lower than you would expect given the depreciation. Even if you depreciate the exchange rate you can't create more fish.”

That has led to a big political debate about adopting another currency, with the euro as a favourite – but some even proposing the Canadian dollar.

“If we would have another currency we would have more stability,” says Katrín Júlíusdóttir, finance minister.

A related myth for some Icelanders is that capital controls – restrictions on the flow of currency in and out of the country – have been proven to be a success on the island. Mr Gudmundsson calls them “in some sense” Iceland’s version of quantitative easing in terms of putting a floor under asset prices.

But, like QE, many wonder if it is easier to establish capital controls than dismantle them. Says Vilhjálmur Egilsson, head of the Confederation of Icelandic Employers: “They were a big mistake. There is no exit strategy.”
There may be doubts about whether Iceland and its crisis policies can serve as a model for others. But, for Ms Júlíusdóttir and many other Icelanders, there is little doubt that it was the right course to save the tiny island of 320,000 people.
She says: “It was the right way to do it for Iceland. A lot of people lost a lot of money because of the failed banks. It is quite a sad story. Hopefully we can learn from it. A lot of mistakes were made here in Iceland.”
Posted by Sugartit on January 27, 2014 at 9:38 AM · Report this
A better and more intelligent view than those idiotic posts your liberal friends put on Facebook because…. Naomi Klein! . This one by longtime Iceland AP reporter, Anna Andersen:

A Deconstruction of “Iceland's On-going Revolution”
Words by Anna Andersen

Last night, ‘Shock Doctrine’ author Naomi Klein tweeted: “#Iceland is proving that it is possible to resist the Shock Doctrine, and refuse to pay for the bankers' crisis” with a link to an article called, “Iceland’s On-going Revolution,” by Deena Stryker.

This article is full of factual errors, so we tweeted back: “@NaomiAKlein We are fans of yours, but we are sad to say that your tweet and the article it cites are both dead wrong. #Iceland”

She replied: “@rvkgrapevine tell me and i'll correct”.

So here it is, a deconstruction of that error-ridden article, “Iceland’s On-going Revolution,” which is unfortunately making rounds in the Twitter-sphere.

In the first paragraph, the article states: “Americans may remember that at the start of the 2008 financial crisis, Iceland literally went bankrupt. The reasons were mentioned only in passing, and since then, this little-known member of the European Union fell back into oblivion.”

There are two errors there. One is obvious. Namely, Iceland is not a member of the European Union. The other one is perhaps less obvious, but it is nonetheless an important point. That is, Iceland did not go bankrupt. This factual error was heavily criticised in 2008 when Iceland’s banks collapsed and news spread that Iceland, the country, had gone bankrupt. This is as wrong today as it was then.

Then there’s this statement: “In 2003 Iceland’s debt was equal to 200 times its GNP, but in 2007, it was 900 percent. The 2008 world financial crisis was the coup de grace.”

These numbers are wildly inaccurate (and not to be too pedantic here, but sticking to a multiplier or percent would be helpful when making such a comparison). To set this straight, Iceland’s debt (as in The Central Bank) was equal to 57% of the GDP in 2003 and fell to 43% of the GDP in 2007, according to World Bank statistics. In 2009, that percentage reached 104%.

Now, if by Iceland the author meant Iceland’s banks, then it’s true that the banks’ debt was pretty big—astronomical really—and by 2007, Iceland’s banks did in fact reach 9 times the GDP, though that’s GDP not GNP.

Then there’s this: “The three main Icelandic banks, Landbanki, Kapthing and Glitnir, went belly up and were nationalized, while the Kroner lost 85% of its value with respect to the Euro. At the end of the year Iceland declared bankruptcy.”

Again the statement, “At the end of the year Iceland declared bankruptcy” is wrong. And the Icelandic krónur lost more like 50% of its value compared to the Euro any way you look at it.

Moving on to the next paragraph: “Contrary to what could be expected, the crisis resulted in Icelanders recovering their sovereign rights, through a process of direct participatory democracy that eventually led to a new Constitution. But only after much pain.”

It’s true; we had a referendum to elect a Constitutional Assembly—a group of twenty-five people tasked with writing a new Constitution. But there were 500 plus candidates to choose from, and the results were nullified because proper election procedures weren’t followed. Rather than hold another referendum, those individuals were ‘appointed’ to a Constitutional Committee. They have now submitted a ‘proposal’ for draft of our new Constitution, but we by no means have a new Constitution yet! This is definitely jumping the gun. Our old one still reigns supreme.

Then it says: “Geir Haarde, the Prime Minister of a Social Democratic coalition government, negotiated a two million one hundred thousand dollar loan, to which the Nordic countries added another two and a half million. But the foreign financial community pressured Iceland to impose drastic measures. The FMI and the European Union wanted to take over its debt, claiming this was the only way for the country to pay back Holland and Great Britain, who had promised to reimburse their citizens.”

Okay, come on now. It’s the IMF, not FMI. Furthermore, Geir Haarde is from the right-wing Independence Party, which had a coalition with the Social Democrats.

Back to the Constitution: “This document was not the work of a handful of politicians, but was written on the internet. The constituent’s meetings are streamed on-line, and citizens can send their comments and suggestions, witnessing the document as it takes shape. The constitution that eventually emerges from this participatory democratic process will be submitted to parliament for approval after the next elections.”

Apparently the author was confused about whether or not we had a new Constitution when she started writing and then did some more research toward the end to realise that yes, it is still a draft with a number of hoops to go through.

The idea that the Constitution was ‘crowdsourced’, as the international media has been keen on reporting, is at best half true. But accepting suggestions via Facebook and an Internet submission form is hardly the same as the Constitution being “written on the internet”. It sounds cool though.

While nearly every paragraph in this article is riddled with factual errors, the concluding message is also misleading: “Today, that country is recovering from its financial collapse in ways just the opposite of those generally considered unavoidable, as confirmed yesterday by the new head of the IMF, Christine Lagarde to Fareed Zakaria. The people of Greece have been told that the privatization of their public sector is the only solution. And those of Italy, Spain and Portugal are facing the same threat.

They should look to Iceland. Refusing to bow to foreign interests, that small country stated loud and clear that the people are sovereign.”

First of all, it’s naive to think that Iceland was able to stand up to the IMF. In his article, ‘New York Times Reporting Misses the Mark on Iceland, Prints Neoliberal Line’ on, Sam Knight makes some good points: “Why Iceland is pursuing its welfare-for-the-elite policies is anyone's guess,” he says, “but with the IMF providing emergency currency support, it has had influence in diverting Icelandic resources back toward the financial sector.”

He adds: “If Iceland had refused to share the IMF's worldview, it could have been denied funds necessary to implement capital controls and stop the Krona's tailspin. Failure to adhere to the IMF's demands could have also caused Iceland's sovereign credit rating to drop significantly, which could have isolated Iceland from international capital markets (despite the fact that credit ratings agencies, in the wake of 2008, are in need of urgent reform).”

Whether or not influenced by the IMF, one might note that two of the three banks that Iceland “let fail” because it couldn’t bail them out (they were nine times the country’s GDP), have been re-privatised and there is currently a debate about privatising the third.

Not to mention, there’s the case of HS Orka, in which 98 percent of a publically owned geothermal energy company was sold to Canadian company Magma Energy (now called ‘Alterra Power’), giving it access to geothermal energy in the Reykjanesbær peninsula for 65 years with a renewal option for another 65. This erupted in controversy with Björk leading the crusade against Magma Energy. Alas, it was without success.

The case might as well feature in Naomi Klein’s book, ‘The Shock Doctrine’.

Furthermore, while Iceland may seem like a symbol of sticking it to the financial institutions that brought about the financial collapse, the people really haven’t escaped the burden. To quote respected political commentator Egill Helgason in an article that will print in The Grapevine on Friday: “According to an OECD report Iceland has put more money into its failed financial institutions than any other country except Ireland. So in this way Iceland is not a model—the people in Spain need not wave Icelandic flags.”

To the contrary of the message put forth in this article, “Iceland’s On-going Revolution,” and the notion that Iceland was able to resist the shock doctrine, he says: “The political debate in Iceland has gotten horribly stale and repetitive. In some places Iceland is held up as being a model of how to survive an economic crisis and rebuild society. For most Icelanders this seems totally wrong. Some politicians, including our President, like to flaunt this view when they go abroad, but this is definitely not the feeling in Iceland.”

So, @NaomiAKlein have we crushed the hopes of millions? As a publication we strive to practice good journalism, though we have to say that a part of us is reluctant to correct these kinds of articles, as it is nice to see citizens of other nations, like Spain and Portugal, being inspired by our story. Hope has to come from somewhere.
Posted by Sugartit on January 27, 2014 at 9:42 AM · Report this
@5 It's not clear to me that Iceland ever explicitly said their government was backing their banks' offshore dealings. If that guarantee had been made and then reneged upon, I would agree with your discomfort.

In any event, the reason the bank collapse didn't matter that much to Iceland, other than indemnifying their own citizens' for their deposits, is that their economy is a "real" one. They make and grow stuff, harness non-polluting (geothermal) energy from the earth, fish, build things, have a tourist trade, create art and literature, mostly for their own consumption but also export. Their finance sector is tiny and no one bends over backwards for it, and the government has a pretty good idea about setting rates and currency valuation to keep things humming, and supporting investment in infrastructure.

It might be tiny, but there are still lessons to be learned from it.
Posted by Brooklyn Reader on January 27, 2014 at 9:48 AM · Report this
@5 In 1882 the British Army invaded Egypt after the Egyptian government defaulted on some loans made to it by British banks. It was called the Bondholders War. Maybe it's time for a repeat performance, or the people who lost money could hire private military contractors to invade Iceland and recoup their investment.
Posted by Ken Mehlman on January 27, 2014 at 10:16 AM · Report this
Of course... iceland's entire population as a country is half that of the Seattle city proper's. It'd be about as ludicrous as allowing Seattle citizens to pay the entire bill for a $3 billion giant underground tunnel.....
Posted by ChefJoe on January 27, 2014 at 10:48 AM · Report this
The key things Iceland did that saved it from economic catastrophe were 1) bailing out depositors who were Icelandic citizens but letting all of the banks' foreign debts go and 2) massively devaluing its currency. The question of whether the banks technically failed or not was actually pretty irrelevant. Of course, bankers always want to save their own fortunes, so they'd have us believe otherwise. And if Iceland's banks hadn't had foreign debts so massive that there was no way the Icelandic government could ever hope to pay them, Iceland probably would have done the same thing everyone else did and we wouldn't have this lovely example of the possible.
Posted by I have always been... east coaster on January 27, 2014 at 6:17 PM · Report this

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