Reykjavík Grapevine - 21.09.2012, Blaðsíða 18

18
The Reykjavík Grapevine
Issue 15 — 2012 Sigrún Davíðsdóttir is an Icelandic journalist and writer, who works for
RÚV and blogs in English at www.uti.is.
Iceland | Crash
In the autumn of 2008, international
media and famous economists de-
scended on Iceland to watch the
first European country plunge into
crisis and become a financial basket
case. Now, they are flocking to Ice-
land to study how a country could
rise up so fast after its deep plunge.
Some even talk about a “miracle.”
The only people who don’t seem to
be in awe of the “miracle” are the
Icelanders themselves.
“The ‘Kreppa’ is over,” Gylfi Zoega pro-
fessor of economics at the University of
Iceland stated this summer. After severe
contraction of the Icelandic economy fol-
lowing the October 2008 collapse of the
country’s three main Icelandic banks—
Kaupthing, Landsbanki and Glitnir—
years of misery, with rising unemploy-
ment and stagnated or diminishing
salaries, seemed unavoidable. But the
“Kreppa” seems to have ended and the
economy is, all things considered, doing
remarkably well.
So well that those who descended
on Iceland in 2008 to witness the doom
and gloom are now returning to study
the Icelandic “Kreppa” remedies. Fa-
mous economists like Nobel-prize win-
ners Paul Krugman and Joseph Stiglitz
debate the Icelandic case and use it to
further their theories.
The short answer is that not saving
the banks and issuing massive write-
downs of loans, both to companies and
individuals, has unshackled the econ-
omy. Additionally, the devalued króna
makes Icelandic goods and services at-
tractive to foreigners. Even nature has
come to aid: the tried and tested means
of Icelandic survival, fishing, has been
good the last few years.
For the national psyche the most im-
portant indicator is the unemployment
figure. In Iceland, it peaked at 9% in
the second quarter of 2009. At the time,
Iceland seemed to resemble Ireland with
its mass emigration, but that trend has
now changed. This year, unemployment
might land just under 7%. In the newly
presented budget for 2013, the estimated
unemployment figure is 5.3%. Last year
saw a 2.6% increase in GDP after a con-
traction of 6.6% in 2009 and 4.4% the
following year.
(Almost) no Icelandic banks
saved
How did Iceland’s “Kreppa”-beating
measures compare to those employed in
other European countries in recession?
Unlike other badly “Kreppa”-hit coun-
tries like Ireland, Greece and now Spain,
the Icelandic state didn’t refinance the
three failed banks. In other words, Ice-
land didn’t save its failed banks.
The credo of the European Central
Bank and the European Commission
has been that no bank must fail in the
Eurozone and no bondholders must suf-
fer losses, so as not to undermine the
faith in the euro. Consequently, the debt
accumulated by private banks has mi-
grated from the private sector to the pub-
lic sector in countries that refinanced
failed banks. Instead of the losses being
born by private institutions, which in-
curred them by reckless lending, they
are being born by taxpayers.
Iceland wasn’t burdened with any
such lofty ideals. Or mostly not—the
Icelandic government did indeed hope
to rescue the banks, but faced with the
enormity of a triple bank failure in au-
tumn 2008 it was forced to drop the
idea. Thus was born the heroic—but not
entirely true—saga of the little country
that refused to save its banks. The three
big banks were well beyond salvation—
but the state did recapitalise a swath of
smaller banks, at quite a substantial cost
to Icelandic taxpayers. However, this
doesn’t alter the fact that foreign credi-
tors bore the brunt of the collapse of the
banks and the Icelandic economy was
not dragged down by the three failed
banks.
Write-downs: a force of good—
and bad
Another concerted action that set Iceland
apart from other European countries in
recession is the widespread and exten-
sive write-down of loans, both for com-
panies and individuals. When debt is too
high to be repaid, writing it down or off
is a classic tool. An economy weighed
down by unsustainable debt turns into
a zombie state of the living dead. Japan
in the ‘90s is still the scariest example of
this situation: debt wasn’t written down
as necessary, partially because no one
wanted to admit the problem.
In Iceland, it was quickly understood
that a massive write-down would ben-
efit the economy. The “currency basket”
loans—foreign-currency loans in or
pegged to more than one currency—had
gone from being an escape from high
Icelandic interest rates to the road to hell
for the borrowers as the króna collapsed
with the banks and the terms of the for-
eign-currency loans shot up. The plight
of these borrowers became the most vis-
ible and discussed effect of the collapse
of the banks—and finding a solution for
them became the dominant political is-
sue.
The legality of the foreign-currency
loans was tested in courts with the Ice-
landic High Court ruling that it was
legal to lend in króna, but illegal to peg
loans to foreign rates. It was a simple
verdict, but anything but simple in
practice as the loans varied greatly. Con-
sequently, the loans have turned into a
nightmare for the new banks, and are so
far only partially resolved.
For private individuals, the “110%
way” has become the standard solu-
tion: mortgages above the value of the
property are written down to 110% of its
value. This has more or less solved the
problem of private debt overhang and
though there will still be people suffer-
ing payment difficulties the “110% way”
seems to have benefitted the economy
as a whole. Similarly, the banks have
developed standard debt guidelines for
companies.
Other economic lubricators are
changes to bankruptcy laws, shorten-
ing the period of bankruptcy to two
years. Compare this to Spain where the
debt period lasts the rest of your life. A
recent article in the German magazine
Der Spiegel recounted how an owner of
several trucks went bankrupt, the bank
took all his trucks and now he and those
who worked for him are out of work and
the truck-owner will remain in this situ-
ation for the rest of his life. In Iceland,
the bank would most likely have written
part of the debt off and the truck-owner
keeps one or two trucks, enabling him to
keep some staff. If the plan had worked
out, he would have repaid the remaining
debt and everyone lived happily ever af-
ter.
The tricky thing for the Icelandic
banks is to convince Icelanders that
write-downs aren’t being used to help
those who were the banks’ favoured
clients before the collapse and who had
access to far too favourable lending.
Write-downs awake suspicion in Iceland
although economists view these means
as an important step out of the economic
zombie state.
Is all of this as good as it
seems?
The greatest challenge to prosperity in
Iceland is recession and low growth in
the European Union, Iceland’s biggest
market. Icesave—this interminable dis-
pute with the Dutch and the British over
the Landsbanki internet accounts, called
“
In Iceland, the bank
would most likely have
written part of the debt off,
the truck-owner kept one
or two trucks, enabling
him to keep some staff.
If the plan had worked
out, he would have repaid
the remaining debt and
everyone lived happily ever
after. „
Iceland: From A “Kreppa” Basket
Case To A Miraculous Example
Words by Sigrún Davíðsdóttir
Continues on page 26
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