Another debt/finance fluster**** thread, but specifically, on Iceland.

[Mr. Dictator]

So, I don't really have a link to anything, so we'll have to create the content ourselves guys. Scary, I know, but at least I'm brave enough to try and tackle this issue without a solid OP to bounce off of.

In a nutshell, I would like the Icelandic people's apparent success in indicting finance figures, re-writing their constitution, and proclaiming debt forgiveness put into perspective.

I realize this has been going on for a few years, but considering all of these moves, I'm astounded that it has really just gotten to me. Perhaps its been discussed here, perhaps not, but I figure we can still keep our abortion and religious conversations going on whilst going over this.

I know this much, correct me if I'm wrong:

Banks were nationalized.
Government resigned, en masse.
Debt forgiveness was announced.
Denmark and Brits are so mad.

Perhaps someone with more knowledge of the situation will be my white knight and save me from this dark cavern of American media.

 

[Borachio]

Is this not relevant?:

By mid-2012 Iceland is regarded as one of Europe's recovery success stories. It has had two years of economic growth. Unemployment is down to 6.3% and Iceland is attracting immigrants to fill jobs. Currency devaluation has effectively reduced wages by 50% making exports more competitive and imports more expensive. Ten year government bonds are issued below 6% far lower than PIIGS nations in the EU. Tryggvi Thor Herbertsson, a member of parliament, notes that adjustments via currency devaluations are less painful than government labor policies and negotiations. Nevertheless, while EU fervor has cooled the government continues to pursue membership.[191]

see Iceland economy 2012 on wiki

UK local authorities took a hit of £840 million. Which is more than they liked but not really a great deal.

There was some talk about Lithuania today. A country which has gone down the harsh austerity route, with some mixed results. But that's in the Eurozone, no?


(I'm a certified non-expert on everything; so what "Ten year government bonds are issued below 6%" really means in terms of good or bad, I don't know.)

 

[Andvare]

Are Denmark mad? How so? I know I'm Danish, and I'm not mad, at least not as in angry mad, though perhaps a bit as in "you should be hospitalized" mad.

 

[Leoreth]

There was some talk about Lithuania today. A country which has gone down the harsh austerity route, with some mixed results. But that's in the Eurozone, no?

No, Lithuania isn't in the Eurozone.

By mid-2012 Iceland is regarded as one of Europe's recovery success stories. It has had two years of economic growth. Unemployment is down to 6.3% and Iceland is attracting immigrants to fill jobs. Currency devaluation has effectively reduced wages by 50% making exports more competitive and imports more expensive. Ten year government bonds are issued below 6% far lower than PIIGS nations in the EU. Tryggvi Thor Herbertsson, a member of parliament, notes that adjustments via currency devaluations are less painful than government labor policies and negotiations. Nevertheless, while EU fervor has cooled the government continues to pursue membership.[191]

Here lies one of the key differences to the PIGS in trouble (Ireland's still out so no need for the double I).

 

[Cutlass]

Well Iceland had promised that the government would cover the banks. And then didn't, which is why the Brits are mad, since much of the money lost was theirs. The Iceland banks were never anything other than fraudulent in the first place. But no one cared about that until it was too late. Having gone that deep into fraud, there was really no option except default. Iceland's people were literally unable to make good on what the banks destroyed.

The lesson is, don't trust a bank unless you can trust the bank's regulators. And Iceland's banks were not regulated.

 

[innonimatu]

Well Iceland had promised that the government would cover the banks. And then didn't, which is why the Brits are mad, since much of the money lost was theirs. The Iceland banks were never anything other than fraudulent in the first place. But no one cared about that until it was too late. Having gone that deep into fraud, there was really no option except default. Iceland's people were literally unable to make good on what the banks destroyed.

The lesson is, don't trust a bank unless you can trust the bank's regulators. And Iceland's banks were not regulated.

So, like all the other banks, in the EU, the US, and so on... The only difference is that they haven't defaulted yet.

 

[BvBPL]

Are Denmark mad? How so? I know I'm Danish, and I'm not mad, at least not as in angry mad, though perhaps a bit as in "you should be hospitalized" mad.

Several years ago, Iceland's banks had a lot of money from foreign nationals, esp Danes and the British. When the banks went under, the gov't decided not to cover the debt of the banks. If I recall correctly, the UK & Danish gov'ts were pretty upset at that.

Well Iceland had promised that the government would cover the banks.

Did the Icelandic gov't initially insure the banks? I don't remember, but I feel like they didn't. This whole thing came down a while ago so my memory is a little foggy.

 

[Cutlass]

So, like all the other banks, in the EU, the US, and so on... The only difference is that they haven't defaulted yet.

Oh, no, not at all.

Iceland banks, and similar to Ireland banks, had virtually no legitimate banking operations going on. The other banks were normal banks that did things wrong. The Iceland banks were the definition of wrong banking that did nothing right.

Did the Icelandic gov't initially insure the banks? I don't remember, but I feel like they didn't. This whole thing came down a while ago so my memory is a little foggy.

I'm trying to recall and I can't. I haven't read on it in a year or so.

 

[Andvare]

Several years ago, Iceland's banks had a lot of money from foreign nationals, esp Danes and the British. When the banks went under, the gov't decided not to cover the debt of the banks. If I recall correctly, the UK & Danish gov'ts were pretty upset at that.

Your memory, and mr. Dictator's, is lacking, it wasn't Denmark, but the Netherlands.

 

[Glassfan]

During the Greek Crisis it was pointed out that an option was to leave the Eurozone so that it could devalue it's currency to aid in recovery - a tactic disallowed by the European Central Bank to Eurozone members. It looks like Iceland successfully followed this strategy, reducing it's debt substantially and upgrading it's credit rating - but who ends up actually paying the costs?

By devaluing it's currency, worker's wages are effectively reduced, without having to negotiate with the workers directly to do so (remember the riots in Greece?). They are paid the same krona they always have but now it's worth less (worthless). Foriegn investors, including those holding Icelandic bonds and notes are cheated out of their returns. Retirees and those on fixed incomes lose bying power and are impoverished.

IMHO, it's an old-fashioned, pre-Keynesian tactic that only tiny, irresponsible, independent economies can still employ. Larger, responsible economies have to be more honest to maintain national and international confidence in their money systems. The Dollar and the Euro are actually supported by their citizen's belief that the paper has value, and manipulations of this kind would be damaging.

 

[rugbyLEAGUEfan]

No offense to any Icelandic members (though I'm fairly sure I'm safe even if it is offensive), but can someone explain to me why millions of dollars from overseas was poured into their banks? Obviously they must have had attractive rates but it doesn't jump out at me as a red hot investment.

 

[Cutlass]

No offense to any Icelandic members (though I'm fairly sure I'm safe even if it is offensive), but can someone explain to me why millions of dollars from overseas was poured into their banks? Obviously they must have had attractive rates but it doesn't jump out at me as a red hot investment.

Because those banks were unregulated. Being unregulated, they could engage in riskier practices, and so were expected to generate higher levels of returns. Nut, being "banks", they were thought to be generally "safe", since people are accustomed to banks in general being basically safe. People forget that banks are only safe due to government regulation and guarantees. So those who deposited in the banks did not do their due diligence, and so have no real right to get their money back. They simply failed to realize that they were investing in a high risk pool rather than a, relatively, safe bank. Once it all started to fall into the crapper, the host governments were entirely in the wrong to guarantee any of it.

During the Greek Crisis it was pointed out that an option was to leave the Eurozone so that it could devalue it's currency to aid in recovery - a tactic disallowed by the European Central Bank to Eurozone members. It looks like Iceland successfully followed this strategy, reducing it's debt substantially and upgrading it's credit rating - but who ends up actually paying the costs?

By devaluing it's currency, worker's wages are effectively reduced, without having to negotiate with the workers directly to do so (remember the riots in Greece?). They are paid the same krona they always have but now it's worth less (worthless). Foriegn investors, including those holding Icelandic bonds and notes are cheated out of their returns. Retirees and those on fixed incomes lose bying power and are impoverished.

IMHO, it's an old-fashioned, pre-Keynesian tactic that only tiny, irresponsible, independent economies can still employ. Larger, responsible economies have to be more honest to maintain national and international confidence in their money systems. The Dollar and the Euro are actually supported by their citizen's belief that the paper has value, and manipulations of this kind would be damaging.

The costs, much fall on the people of Iceland, but the rest falls on the depositors, who should have but didn't bother to understand the risks they were putting their money into. Iceland actually had no choice about devaluation. They could not have not done it, once the government was on the hooks for the debts of the banks. The real irresponsibility was in letting the banks run wild unregulated, and depositing money in unregulated banks.