Iceland is Bankrupt

[August1991]

Iceland’s de facto bankruptcy—its currency (the krona) is kaput, its debt is 850 percent of G.D.P., its people are hoarding food and cash and blowing up their new Range Rovers for the insurance—resulted from a stunning collective madness. What led a tiny fishing nation, population 300,000, to decide, around 2003, to re-invent itself as a global financial power? In Reykjavík, where men are men, and the women seem to have completely given up on them, the author follows the peculiarly Icelandic logic behind the meltdown.

Just after October 6, 2008, when Iceland effectively went bust, I spoke to a man at the International Monetary Fund who had been flown in to Reykjavík to determine if money might responsibly be lent to such a spectacularly bankrupt nation. He’d never been to Iceland, knew nothing about the place, and said he needed a map to find it. He has spent his life dealing with famously distressed countries, usually in Africa, perpetually in one kind of financial trouble or another. Iceland was entirely new to his experience: a nation of extremely well-to-do (No. 1 in the United Nations’ 2008 Human Development Index), well-educated, historically rational human beings who had organized themselves to commit one of the single greatest acts of madness in financial history. “You have to understand,” he told me, “Iceland is no longer a country. It is a hedge fund.”

....

Iceland instantly became the only nation on earth that Americans could point to and say, “Well, at least we didn’t do that.”

...

That was the biggest American financial lesson the Icelanders took to heart: the importance of buying as many assets as possible with borrowed money, as asset prices only rose. By 2007, Icelanders owned roughly 50 times more foreign assets than they had in 2002. They bought private jets and third homes in London and Copenhagen. They paid vast sums of money for services no one in Iceland had theretofore ever imagined wanting. “A guy had a birthday party, and he flew in Elton John for a million dollars to sing two songs,” the head of the Left-Green Movement, Steingrimur Sigfusson, tells me with fresh incredulity. “And apparently not very well.”

...

“The Perfect Bubble,” Aliber calls Iceland’s financial rise, and he has the textbook in the works: an updated version of Charles Kindleberger’s 1978 classic, Manias, Panics, and Crashes, a new edition of which he’s currently editing. In it, Iceland, he decided back in 2006, would now have its own little box, along with the South Sea Bubble and the Tulip Craze—even though Iceland had yet to crash. For him the actual crash was a mere formality.

Vanity Fair

This post from another thread still seems pertinent:

I think the case of Iceland is interesting in itself but it also points out something else. Fannie Mae, Freddie Mac, George W. Bush, Alan Greenspan, Bill Clinton, CRA, quants, credit default swaps can hardly be faulted for Iceland's economic collapse. The Icelanders seem to have brought this on themselves.

Link

Seen from afar or with hindsight, speculative bubbles are among the most absurdly comical events of any society.

[KeyStone]

Classic example of why socialism does not work. And why the US should not move forward with the Bail out plan. Government and Business should not mix.

Well, in terms of Iceland being socialist.

They ranked 14th globally in terms of economic freedoms.

Corporate tax was relatively low at 15%

They have a flat tax of around 35% on personal income.

So, I hardly think that Iceland going bankrupt is an example of why socialism is wrong.

Buying up the banks was something they did after the fact, in an attempt to save itself.

Imagine that there is a leak in the damn.

People try to plug the leak, but another leak breaks out and the damn crumbles.

This is not an example of why you shouldn't try to plug the leak, but that is pretty much how your logic is working.

In fact, Iceland just completed privatizing their banks in 2000.

The privately held banks (with little government interference) then went about acquiring substantial international assets.

When the bottom fell through on those assets, the banks essentially went belly up.

So, actually, this is the exact reverse of an example of socialism not working.

This is an example of the free market laissez-faire strategy being a dismal failure.

[M.Dancer]

Some ordinary Icelanders face a similar problem to the one that brought down the banks. In recent months, many mortgages were taken out in foreign currencies - marketed by the banks as a way to benefit from lower interest rates abroad, as rates in Iceland rose into the double digits.

Now, with the Icelandic krona plunging, homeowners suddenly have to pay back far more expensive euro or dollar values of their mortgages. At the same time, house prices are falling.

In a nutshell, this is the cause of most of their woes. And it wan't just mortgages in Euros or US$..they could also have credit cards billed in foreign currencies. Average people were carrying huge amounts of personal debt and when their currency started to fall gradually, their interet payments started to rise quickly. Soon it became a catastrophe.

there is a lesson here for all of us especially the gov't. KEEP SPENDING IN CHECK.

High Personal Debt

Personal Debt in Iceland reached 213% of personal disposable income. In Britain this figure is 164%. In the US, it is 140%. In Germany about 100%. The high levels of personal debt were reflected in the balance sheets of the Icelandic banks who were willing to lend with few questions asked.

High Total Debt.

As well as high personal debt, government and corporate debt mean Iceland's total debt as a percentage of GDP has ballooned to about 350% of GDP External debt now accounts for 80% of total debt. (money week - Iceland)

http://www.economicshelp.org/2008/10/probl...nd-economy.html

Edited March 4, 2009 by M.Dancer

[GostHacked]

When did Freddie and Fannie become Canadian banks?

Don't be an idiot, try reading the thread before posting again. You know as well as I that these are US banks and I had never stated they were Canadian banks.

The US is buying up bad debt by pouring bailout money and this new stimulus package into these banks. The US government is buying stakes in these banks. And to those who don't think this is happening, or already happened.

http://www.ctvbc.ctv.ca/servlet/an/local/C...ishColumbiaHome

U.S. President George Bush announced a $250-billion government plan Tuesday to directly buy shares in leading U.S. banks, saying the drastic step was "not intended to take over the free market but to preserve it."

http://www.chicagobreakingnews.com/2009/02...bad-assets.html

WASHINGTON -- An administration official said today the overhaul of the government's $700 billion financial rescue program is likely to include a partnership with the private sector to buy troubled assets.

http://online.wsj.com/article/SB122390023840728367.html

WASHINGTON -- The U.S. government is expected to take stakes in nine of the nation's top financial institutions as part of a new plan to restore confidence to the battered U.S. banking system, a far-reaching effort that puts the government's guarantee behind the basic plumbing of financial markets.

[jbg]

So, actually, this is the exact reverse of an example of socialism not working.

This is an example of the free market laissez-faire strategy being a dismal failure.

Finally, you and I agree. Market laissez-faire strategies have little place in the financial sector. People must have total faith, trust and confidence in the safety of their banks, or the system will freeze. No doubt about it.

We should have learned this in 1929, 1987 and 1990. At least we have our chance now, even though the people who caused the problem think they are uniquely qualified to profit from it and get themselves us out of the problem.

[August1991]

Finally, you and I agree. Market laissez-faire strategies have little place in the financial sector. People must have total faith, trust and confidence in the safety of their banks, or the system will freeze. No doubt about it.

We should have learned this in 1929, 1987 and 1990. At least we have our chance now, even though the people who caused the problem think they are uniquely qualified to profit from it and get themselves us out of the problem.

jbg, I wouldn't be so quick to make this conclusion.

The US Fed dates from 1913 and the FDIC from the 1930s. In the 19th century, teh US had no State central bank and no State currency as such. Private banks issued currency taht amounted to American Express traveller's cheques. The period was known as "wild-cat banking".

And yet, betweeen 1865 and 1914, despite a severe Panic or two, the US rose to become a major economic power in the world.

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IMHO, what happened in Iceland is no different from what happened in Amsterdam in the 17th century. It is sometimes referred to as "irrational exuberance". I suspect closed societies dependent on rumour and word of mouth are more inclined to such bubbles but they can happen in any market, anywhere.

The aftermath of a bubble can be devastating, as both Icelanders and Americans are now learning.

Bubbles are one weakness of markets, and I don't think that they are properly a market failure.

Edited March 26, 2009 by August1991