Jun 26 2012

Booming Iceland: it zigged where others zagged

Posted by: Nick Shaxson in: Thoughts

The Telegraph is reporting that

“Iceland, whose economy has recovered rapidly following the 2008 collapse of its banking sector, on Friday repaid $483.7 million in loans to the International Monetary Fund.”

It is growing fast, too: 2.4 percent growth this year and next, according to OECD forecasts: 12 times faster than the forecast growth for the Euro area. What is behind Iceland’s success, in comparison to other similarly financially plagued countries such as Ireland? Well, many factors, but it’s interesting to see this (last November, but it’s still appropriate) from the IMF , which seems to be making a habit now of breaking with its old orthodoxies.

“Just as Iceland’s financial crisis stands out in terms of its sheer scale, so does its unconventional path to recovery. “Iceland zigged when all the conventional wisdom was that it should zag,” Nobel Prize winner and New York Times columnist Paul Krugman said at a conference in Reykjavik.
. . .

The policies that were adopted included capital controls to prevent massive capital outflows and a disorderly depreciation of the exchange rate, allowing the banks to fail and not socializing the losses, and a decision not to tighten fiscal policy during the first year of the program, which helped protect the country’s welfare state.
. . .
The welfare state was used to soften the impact on households, and benefits were redirected to lower income groups.”

So here we have the IMF saying, in effect, that austerity (“Camerkozy economics“) is bunk, and capital controls are a good idea (and for more on austerity, this graph says it all). There are other unorthodoxies:

“Iceland’s economy has similarly benefitted from a debt forgiveness programme arranged by Prime Minister Johanna Sigurdardottir – and agreed to with the nation’s banks – that allowed Iceland’s households to write off any debt in excess of 110 percent of the value of their homes.
. . .
a Supreme Court ruling in June 2010 that found loans indexed to foreign currencies were illegal, meaning households no longer needed to cover krona losses.”

And for a short summary:

“it allowed banks to go bust, it defaulted on its debt, it reneged on international deals and so on, putting taxpayers first.”

And an even pithier summary from Bloomberg:

“Iceland’s approach to dealing with the meltdown has put the needs of its population ahead of the markets at every turn.”

And it appears to have done rather well as a result: certainly in comparison with many others that have taken alternative paths. Not all is good, of course: there is still quite widespread poverty in Iceland, a big real estate bubble, and large outstanding household debts (the question is: if enforce debt forgiveness appears to have been so successful, why not take it further, and let the banks pick up the pieces?.

Nothing particularly new here: just sayin’. But one thing that you would never, ever, see in blind-eye Britain, is this:

“Iceland’s special prosecutor has said it may indict as many as 90 people, while more than 200, including the former chief executives at the three biggest banks, face criminal charges.”

2 comments so far

Bill Kruse 6th June, 2012 11.21 am

Ah, odious loans 🙂 Given that our whole banking system stinks, could we not improve on the Icelandic example and have a debts to bankers jubilee?

Maria das Santos 6th June, 2012 11.57 am

Well done Iceland,which I am sure had its arm up its back from the populace to put the people first.Meanwhile,two of the largest perpetrators of Iceland’s rip-off live quite nicely here in Chelsea,England and of cours Monaco.These criminal types,large it over us peasants,whilst sitting atop a pharmaceutical empire which was financed by Icelandic banks and we the Brits are one of its customers via the NHS.
These friends of the Russian oligarchs that laugh at our pathetic attempts to make a living rip us off with impunity and proceed to buy favours at the NHS and Pharmaceutical Society of GB,whilst being one of their largest suppliers.Yeah and this all fine!

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