Yes children,
all that money has already been lost through recklessness and sticking
taxpayers with the bill and thus draining the economy of cash liquidity is
actually impossible. However the
juggling game ended, it was never possible do this, particularly in a small
economy.
Now
international banking is discovering the joys of dealing with the borrower from
hell. In the meantime, Iceland is nicely
recovering and regaining its internal economy with a vengeance. Bankers are now going to learn the time value
of not paying interest. Sooner or
preferably later, all creditors will settle and go away. It is obvious that none of the money involved
ever landed in Iceland itself.
It may have been
stark necessity, but the lesson book is now open to all and represents a clear
warning to bankers regarding the likely terms of trade if there happens to be a
next time around. Notice Krugman’s
position which I concur with whole heartedly.
Iceland bounces back from the banking brink
By Simon Bowers, The Guardian
Sunday, October 6, 2013
A new mood of proud nationalism is emerging in
economically resurgent Iceland after an out-of-control banking system sank the
country into financial meltdown exactly five years ago. Riding this wave of
confidence is 38-year-old prime minister, Sigmundur Davíd Gunnlaugsson, elected
in April on populist promises of mortgage relief for every homeowner.
Gunnlaugsson earned his spurs in years of outspoken
campaigning against the foreign creditors who still haunt Iceland, particularly
the British and the Dutch governments, which intervened after the collapse of
Landsbanki – the bank behind Icesave – on 7 October 2008.
Hundreds of thousands of ordinary British and Dutch
savers had previously switched their savings into online Icesave accounts,
attracted by market-beating interest rates and promises that: “You can also
rest assured that with Icesave you are offered the same level of financial
protection as every bank in the UK.”
When the crash came, however, Iceland’s deposit
guarantee proved worthless, forcing the UK and the Netherlands to use their own
taxpayer funds to compensate ordinary savers and sparking a poisonous
diplomatic row.
It was a spat that, against the odds, Iceland won.
While many other politicians in Iceland had urged a policy of appeasing the
enraged British and Dutch governments, Gunnlaugsson had insisted they should go
hang. “Icelanders, as descendants of the Vikings, are highly individualistic
and have difficulty putting up with authorities, let alone oppression,” he said
in one of his first speeches as prime minister on Iceland’s Independence Day in
June this year.
“This was clearly demonstrated in the Icesave
dispute, in which the people rejected an agreement they considered unfair. This
was later upheld by an international court, which showed that the people’s
sense of justice was a reliable indicator to follow. ”Having helped win the
famous Icesave victory from outside government, Gunnlaugsson has promised to
carry that uncompromising approach with him as prime minister, hinting at a new
wave of attacks on the interests of foreign creditors to Iceland’s three failed
banks: Kaupthing, Glitnir and Landsbanki. Between them, these institutions had
assets more than nine times the size of Iceland’s economic output when they
failed in 2008.
From the wreckage, only three modest domestic banks
emerged, allowing Iceland to keep functioning. The country was also able to let
its overheated currency devalue, and impose capital controls to bring some
stability.
Meanwhile, however, international bondholders and
depositors were left out in the cold, waiting to recover what scraps they could
from the banks’ administration processes. Five years on and they are still
waiting.
Meanwhile, Gunnlaugsson’s main pre-election pledges
were to squeeze these foreign creditors – characterized as “hedge funds” or
“vulture funds” – in order to bankroll a 10% mortgage relief program for all
homeowners and a string of pro-business tax cuts.
Political opponents savaged the pledge. “It was like
promising to bring back [the boom of] 2007,” reflects the Left-Green former
finance minister Steingrímur Sigfússon. But the Icelandic electorate loved it.
And with creditors’ interests still locked in slow
administration processes, and behind tight capital control walls, Gunnlaugsson
believes he has a strong hand to play.
During the election campaign this year, he said: “This
does not revolve around the confiscation of assets. The loss has already been
incurred. It was mostly borne by foreign creditors who have recognized the loss
and got out. In their place came hedge funds that have profited enormously
— on paper — from the collection now of much that was considered lost and
written off …
“It cannot be accepted that Icelanders should slave
away to increase such collections and regain that which had already been lost
without getting any share in it.”
Creditor groups remain circumspect, keen to get into
private discussions with the new administration as quickly as possible. Behind
the scenes, however, they are examining their legal options carefully should
Gunnlaugsson’s aggression go too far. Their goal is to strike a deal that will
allow foreign creditors to access more than £5bn of foreign currency assets
tied up with the three banks’ administrators and barred from exiting Iceland.
“We have been attempting to engage for some time and fail to understand the
lack of progress from the authorities,” said one source close to the creditors.
Gunnlaugsson’s rise to power shocked some observers
outside Iceland, who thought the electorate might give their backing to the
Left-Green-led coalition that had taken power after the banking crash and
steered the country through the strictures of an International Monetary Fund
program, and back to growth.
Instead, the Left-Greens suffered the heaviest
defeat in Icelandic history after an election campaign dominated not by
economic achievements but by the fallout from the Icesave saga.
Bouncing back into office came a coalition of the
two rightwing parties – the Independence Party and Gunnlaugsson’s Progressive
Party – that had been in charge for much of Iceland’s discredited boom years
between 2003 and 2008. “The old rascals are back,” laughs Geir Haarde, former
Independence Party leader and prime minister at the time of the crash.
The previous government had twice negotiated terms
under which Iceland would repay the UK and the Netherlands, with interest, for
the cost of bailing out Icesave savers. It was made plain to ministers at the
time that continued IMF support depended on such a deal.
But both proposals, despite being passed by the
Icelandic parliament, were overwhelmingly defeated in public referenda thanks
in part Gunnlaugsson. Popular opinion in Iceland had railed against what
Gunnlaugsson grass roots campaign group InDefence portrayed as bullying forces
from overseas, set on extracting reparations from Reykjavik akin to those
sought from Germany in the Treaty of Versailles.
InDefence attacked Britain in particular, accusing
Gordon Brown’s government of deliberately damaging Iceland’s standing in
international markets in 2008 by using anti-terrorism laws to freeze the UK
assets of Landsbanki. The bank, together with Iceland’s finance ministry, was
even placed on a UK list of financially sanctioned regimes alongside North
Korea and Al Qaida.
As time went on, however, eminent economists began
to reassess Iceland’s reputation as a pariah state, contrasting it favorably
with, among others, Ireland, which had been similarly laid low by an outsized
banking sector and forced to seek emergency help from the IMF.
“Where everyone else bailed out the bankers and
made the public pay the price, Iceland let the banks go bust and actually
expanded its social safety net,” noted Paul Krugman, admiringly. Iceland, he
found, had demonstrated the “case for letting creditors of private banks gone
wild eat the losses”.
Nobel-prize winner Joeseph Stilitz agreed. “What
Iceland did was right. It would have been wrong to burden future generations
with the mistakes of the financial system.” For Financial Times economist
Martin Wolf too, it was a triumph. “Iceland let the creditors of its banks
hang. Ireland did not. Good for Iceland!”Less good, of course, for the foreign
creditors. And Not all of the foreign creditors are the vulture funds
Gunnlaugsson talks of. British and Dutch taxpayers still have significant
exposure to the Landsbanki administration. As priority creditors they have had
almost 55% of their claims repaid, though the remainder will take a good deal
longer to be paid out. There are UK local authorities and charities, too, which
entrusted more than £1bn with failed Icelandic banks and are still waiting to
get much of their money back. Meanwhile, taxpayer-controlled Royal Bank of
Scotland had been one of the largest investors in Icelandic bank bonds, a
position that has left it a non-priority claimant, expecting only minimal
returns in its claims.
Until recently RBS had remained on the banks’
creditor lists but sold its positions to distressed debt specialists earlier
this year — at a heavy loss — as the outlook for creditors began to look more
uncertain in the face of Gunnlaugsson’s rising fortunes.
The Icelandic prime minister has promised to give
further details of his populist programme for tax cuts and home loan debt
relief next month, and will be under pressure to show how he expects to fund
such moves. It remains to be seen if he gains more from squeezing foreign
creditors trapped within Iceland’s capital controls than he loses in terms of
the damage to Iceland’s reputation among international investors.
Last month Gunnlaugsson flew to London to address
the Iceland Investment Forum, finishing his speech by declaring: “Hope to see
you, and your money, in Iceland.”
The response, from an audience largely of Icelanders
and representatives of the foreign creditors, was a ripple of nervous laughter.
Gunnlaugsson will not want that laughter to grow any louder.
guardian.co.uk © Guardian News and Media 2013
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