Reykjavík Grapevine - 11.03.2011, Síða 7

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The Reykjavík Grapevine
Issue 3 — 2011
Where Is Iceland’s Stock Exchange Today?
Somewhere ‘Hot as Ice’, like Britney Spears.
Hit Me One More Time!
For whatever reason, we got two articles this month that somehow
have to do with finance and Britney Spears. While it makes for a
nice layout theme, it leaves us wondering: WHY?
Have you read this 'Deep Freeze' book
yet? Drop us a line if you did, and tell
us about it.
Much like Britney Spears, the Iceland
Stock Exchange went from topping the
charts to having a meltdown in 2008
to basically falling off the face of the
planet. While Britney’s current where-
abouts don’t concern us too much, it
occurred to us to check up on the stock
exchange to see if it hadn’t ‘come out
from under’ the rubble.
SHOWDOWN
Spooling back to the big ‘showdown’
that buried the stock exchange takes
us to Tuesday, October 14, 2008. The
exchange opened that morning after
having been closed for five days due
to the unusually volatile market condi-
tions at the time. Recall that Iceland’s
three largest private banks had just
been taken over by the State. Only this
temporary closure was akin to putting a
band-aid on a wound in need of many,
many stitches to hold it together, and
the exchange subsequently plummeted
a whopping 76 percent.
Kristín Jóhannsdóttir, a spokesper-
son for the Iceland Stock Exchange,
explained that the 76 percent drop was
due to Iceland’s three largest banks
being de-listed. However, it only sunk
deeper after that. The OMX15 index
“peaked on July 18, 2007 at 9016,”
Kristín explained. “And its lowest point
was obviously after the collapse just
before we ceased calculating it on April
1, 2009 at 212,05.”
It’s definitely ‘outrageous.’ But, it’s
not surprising given that—as Michael
Lewis pointed out in his Vanity Fair ar-
ticle ‘Wall Street on the Tundra’—“From
2003 to 2007, while the U.S. stock mar-
ket was doubling, the Icelandic stock
market multiplied by nine times. Reyk-
javík real-estate prices tripled. By 2006
the average Icelandic family was three
times as wealthy as it had been in 2003,
and virtually all of this new wealth was
one way or another tied to the new in-
vestment-banking industry.”
WHERE ARE yOU NOW?
Two and a half years later, it looks like
the stock exchange is still very much
under the rubble, which explains why it
hasn’t been in the news much since the
big crash. There are currently eleven
companies listed on the market, com-
pared to 75 in its heyday. At that time, it
traded at 120 percent of Iceland’s GDP.
Today, it’s a mere twenty.
Due to the large exodus of com-
panies, the exchange was re-indexed
in January 2009 and is now called the
OMX16 rather than the OMX15. This
makes it complicated compare to the
index before and after January 2009.
But, one thing is for sure. There has
been little growth in the last two years.
The new index started at 1000 and
peaked just this February at 1009,7.
The exchange did, however, make
an appearance in the news last month,
with Fréttablaðið doing a kind of ‘meet-
and-greet’ with new stock exchange
president, entitled “The President Who
Didn’t Want To Be A Professor.” We
learned that the new president, Páll
Harðarson, has an identical twin broth-
er who also works at the exchange.
They have done nearly everything to-
gether, from attending all of the same
schools to spending most of their life
living and working together.
ANTICIPATING
But personal details aside, it turns
out that Páll thinks this year is going to
be ‘hot as ice,’ anticipating a number
of companies listing in the market. He
says two are in the process of listing
and a number of others have expressed
interest. Kristín offered that they could
see as many as ten, bringing the total to
around twenty companies on the mar-
ket.
Incidentally, Britney is releasing a
new album this year called, ‘Femme Fa-
tale,’ which will be the first since that
2008 ‘Circus’ of hers. I suppose we’ll
have to check back on the charts later
this year.
ANNA ANDERSEN
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Stocks traded,
total value (% of GDP)
Finance | 'STOCK MARKET BOOM'
News | Iceland in the
International Eye: February
Easy Money,
Even Money
‘Deep Freeze: Iceland’s Economic Collapse’
(Ludwig von Mises Institute), by Philipp Ba-
gus and David Howden—both economists
specialised in business cycle theory—
is hot off the presses, and packs a punch.
The authors propose that Iceland’s economic
collapse of 2008 was almost entirely down to
poor regulatory policies, and point their pro-
verbial fingers straight at the Central Bank
of Iceland and its master helmsman, Davíð
Oddsson.
In the poignant foreword, Toby Baxen-
dale, founder of the UK’s Cobden Centre
(an advocacy promoting deregulated trade
and business policies) and a fish trader with
strong ties to Icelandic fishing industry, paints
a picture of a government in constant fear of
losing control of its natural resources. “The
[Icelandic] government,” he says, “not want-
ing the lifetime of fish quotas to get into the
hands of a nasty foreign creditor, would not
and still does not allow them to go bust. This
irresponsible action on behalf of government
will ensure these zombified fish companies
will continue undead for many years to come.”
Bagus and Howden make a strong case.
In the boom years, a major money-spinner for
Iceland’s three largest banks at the time—Glit-
nir, Landsbanki and Kaupþing—was ‘maturity
mismatching’: the use of short-term liabilities
to invest in long-term assets. Not that this
tactic was unusual in the global banking sec-
tor, but there were high risks, which the bank-
ers took for granted—perhaps even with just
cause—believing that the Central Bank would
cover their backs. We all know that at the
time, Icelandic banks were churning ten times
more money than the nation’s entire GDP.
The authors specify: “The Central Bank of
Iceland had effectively given a green light to
the banks to shoulder increasing amounts of
short-term risk uncompensated by assets of
corresponding risk or duration. This seemed
to work well until global liquidity dried up…”
At the end of the day, it was a simple cash
flow problem. And mismatching is considered
an acceptable, albeit risky undertaking. The
Central Bank, it appears, was ready to burden
all their bankers’ risks. With the 2001 New Act
of the Central Bank of Iceland, “the Central
Bank had committed itself explicitly to provid-
ing this function.”
And things were going well, so why
worry?
The major other factor, according to the
authors (hazardously brushed aside by the
Central Bank), was increased speculation in
the Icelandic króna. This was mostly due to
the underpricing of risk: “Domestic interest
rates were higher than those of foreign cen-
tral banks, which had under-taken even more
extreme loose-money politics than the Cen-
tral Bank of Iceland.” As Bagus and Howden
elucidate, investors preferred to indebt them-
selves in dollars, euros or yen at ridiculously
low interest rates to invest in local assets.
They then ask the obvious question: Why did
Icelandic banks engage in such Las Vegas-
style tactics? The answer, they explain, is be-
cause the bankers believed in governmental
and institutional guarantees— even beyond
the Central Bank of Iceland—all the way to the
IMF. They took for granted that the exchange
rate risk was minimal. There is an illusion,
they say, that “consists of the notion that gov-
ernment intervention can and will help keep
exchange rates more stable than is really the
case.”
Inferring, of course, that even now some
may still be harbouring such illusions.
The authors remind that the IMF reported
in 2004 that Iceland’s move into foreign mar-
kets could only be seen positively. The curious
thing is that the Central Bank appeared oblivi-
ous to the fact that in 2004 over 20 percent of
foreign-denominated lending was with com-
panies without any export income. It seemed
that the króna would never falter.
Finally, Bagus and Howden propose that
three things need to change in order for life
to return to normal. Firstly, those misaligned
firms and investments—many of which are still
being supported by the government—should
be entirely liquidated. Secondly, a financial
sector should be commensurate with the size
of a country; and thirdly, experience garnered
from past misadventures needs to phase into
a healthy production and consumption mix.
Let the recession iron out all the snags. “Any-
thing that delays the reassignment of labour
to more productive uses [by governmental
regulation and intervention] will increase the
time until the economy returns to normal.”
And so it seems Iceland was not an in-
nocent bystander of the liquidity crisis. It was
Iceland’s government policies that “fostered
an oversized, indebted, and mismatched
banking system.”
MARC VINCENz
It appears that the Central Bank of
Iceland needs to be deprived of its fi-
nancial independence. The bank’s en-
thusiasm to continue its campaign of
high rates, speculative carry trades,
and swift removal of capital controls
is based on faulty reasoning and poor
planning; plans that are being reformed
without further information.
It is apparent, given the current
economic conditions in Iceland, that
if capital controls were to be lifted in
one step, a significant amount of Ice-
landic krónur (ISK) would instantly flee
to become foreign currency. In a closed
meeting that took place on October 7
(entitled ‘The way out of capital con-
trols’), Central Bank Deputy Governor
Arnór Sighvatsson demonstrated that
they are indeed aware of this:
“The group of so-called impatient
investors is not a fixed size but ex-
tremely variable by expectations of
economic developments in Iceland on
one hand and the situation on global
markets on the other,“ Arnór remarked
at the meeting.
One should bear in mind that “im-
patient investors” are both foreign and
domestic. As Arnór points out, expec-
tations about economic developments
in Iceland will affect the size of capital
leaving the ISK. Most Icelanders have
noticed that economic developments in
Iceland are extremely poor, leaving one
to assume that the Icelandic govern-
ment has increased the size and num-
bers of “impatient investors” with their
lacklustre performance. Furthermore,
the Central Bank has expanded this
capital by feeding it ridiculously high
interest rates at the expense of Icelan-
dic homeowners and taxpayers.
To make matters worse, even more
capital joins this pool over time when
so few investment choices are available
in ISK. It is natural for capital to seek
favourable havens, and unfortunately,
the government is not supporting local
capital investment as the current coali-
tion and has been unable to support
any industrial construction or invest-
ment possibilities in Iceland.
BLACKOUT
The reason the Central Bank cited for
temporarily halting the outflow of ISK
was to prevent “even greater deprecia-
tion of the ISK“. Capital controls were
then incorporated in the current form
on November 28th, 2008. The Central
Bank’s report on “Removal of Capital
Controls” states:
“The main assumption to be able to ex-
ecute a plan for removal of capital con-
trols is that investors assess the risks
of investments in Icelandic assets less
than they have done so far.“
This “main assumption” seems to be
forgotten, as little has been done to
decrease possible risk of investing in
Iceland. The Central Bank argues that
this should be done by compensating
risk with high interest rates. In what
other way could this have been done?
One example is by invigorating the
Icelandic economy and offering at-
tractive local investment opportunities.
Unfortunately, the government and the
Central Bank seem to have ignored
the wonderful opportunity that capital
controls offer, i.e. to cut interest rates
to negative real rates, despite its obvi-
ous benefits. This would offer Icelandic
companies and families ISK financing
on favourable terms, easing the path
not only for increased construction
and economic development throughout
Iceland, but a lighter public debt bur-
den via refinancing of current loans. To
not utilise the benefits of capital con-
trols while paying for its cost shows just
how ill planned our monetary policy has
been.
It is odd to blame capital controls for
dwindling foreign capital, when, at the
same time, the government has repeat-
edly rejected all kinds of investments
such as data centres, plants and private
hospitals.
OOPS! ... I DID IT AGAIN...
Political debate must take place in the
Parliament about the future monetary
structure of Iceland. These matters
must be discussed before the Central
Bank officials begin removing capital
controls. It is obvious that the free-
floating króna experiment—that began
in March of 2001, when the ISK was
floated with inflation targets and last-
ed until November 2008, when capital
controls were re-incorporated—has
failed spectacularly. As economic No-
bel laureate Rubert Mundell pointed
out in a recent interview, there are
several wealthy individuals who could
easily derail the ISK if they so fancied,
via capital flight. The conclusion is
that the tiny ISK has no grounds to be
free-floating. According to Mundell, it
doesn’t really matter to what currency
we link ourselves, as long as we link.”
Economy | Britney
Capital controls, the Central Bank and ol' Britney
VALDIMAR ÁRMANN
BENSON KUA