Firstly, it's only fair to thank Grumpy Jack for bring the first link below to the wider attention of the P.ie audience. I did say I'd start a thread on it unless he was doing it. He gave me his blessing so here goes.
I have for some time believed the following with regard to Iceland and its banking collapse:
- the Icelandics had hung tough with the IMF and didn't just roll over and play cute puppy like Ireland
- the Icelandics cleverly decided to burn their bondholders, unlike silly old Ireland
- the Icelandics also took action against their failing politicians and regulators, found them guilty and packed them off to jail
- massive debt relief was given to heavily indebted households
- as a result of this and not having burdened its tax payers with private sector debt, Iceland was able to recover strongly and the economy is now growing at a healthy pace.
The writer below completely disagrees. Baldur Bjarnason is an Icelandic writer who knows a damn sight more than the self-appointed experts here. In the article below, he makes the following points:
- Iceland accepted the IMF's deal and basically stuck with it to the letter
- they tried (and tried and tried) to bail out the banks but completely screwed up the negotiations So, there was no clever plan from the word go burn bondholders
- most of the key players including the ex-PM, Geir Haarde got off scot-free.
- one guy, Lárus Welding, former CEO of Glitnir Bank has been sentenced to six months but is already appealing. Plus he gets to keep his money....!
- debt relief consisted of lowering any mortgage that was greater than 110% of the property’s value down to 110%. Big deal. See the section on index-linked mortgages below. Within a few months, the households were back in difficulties again.
With regard to the economy, Iceland is growing at just under 3% per annum. It's hardly booming but ostensibly, it's pretty respectable when you see what's happening in the eurozone. However, most of that growth is coming from a growing real estate and property bubble. "So?", you might say. "Isn't it a sign of confidence returning to the property market?".
No. Iceland is still operating capital controls. To support the currency, foreign money invested in Iceland can't be taken out. That money has to go somewhere so it's being invested in property. The property market is mainly dominated by foreign money that can’t escape due to the currency restrictions. The minute those controls are lifted, Iceland is back in the soup.
It gets worse. Due to the country's chronically weak currency (it has lost 96% of its value vs. the Danish krona since 1922), inflation is always an issue. Most loans in Iceland are linked to the consumer price index. If you borrow 100,000 kroner and inflation is 10%, after one year, you'll owe 110,000 kroner, even if you've paid all the interest. Could you conceive a crazier mortgage system?
Wages in Iceland are static or even declining and with inflation hovering between 4 and near 7%, well, it's not pretty. People are not benefiting from the modest growth. Nope, instead, the ever persistent inflation rate means that debt on index-linked loans is growing and growing - by 360 billion ISK since September 2008. And you thought there'd been massive debt relief? When exchange controls are lifted, all bets are off on property prices, of course.
So, is everything rosy in Iceland? No way.
What is actually going on in Iceland | Studio Tendra
Icelandic Economics: Did Icelandic households receive a major debt forgiveness?
Icelandic Economics: Iceland vs. Ireland