Iceland- well on the road to recovery

RATM

Remember that joke around 2008 about the difference between Iceland and Ireland- one letter & 6 months ? Now it seems like one letter and 20-30 years. According to their CSO they are now back at 2006 GDP levels and the Central Bank is trying to cool inflation due to increasing domestic demand.

http://krugman.blogs.nytimes.com/2012/06/13/guess-whos-emerging-from-the-crisis/

To me Iceland's strategy seems simple enough. They had private banking debt. They had a referendum to decide wheather or not the taxpayer should take on this debt. Naturally the taxpayer declined the offer and the lenders got burnt. Next as Iceland was now (relatively) debt free investors came back to the market as they were an attractive option. Now they're well on the way to recovery.

Am I missing something here as to why Ireland cannot still do likewise ? Leaving aside the sovereign debt which is rightfully ours due to overspending on services can we not still repudiate all private banking debt the way Iceland did in order to get out of this hole at least 10-15 years quicker than what it would otherwise take ?

onimpulse

Talking about growth rates & inflation doesn't tell the story. It's largely irrelevant as the majority of people in Iceland saw their mortgages increase hugely & saving devalued. Do you think they care what the GDP growth rate is?

RichardAnd

onimpulse wrote: »

Talking about growth rates & inflation doesn't tell the story. It's largely irrelevant as the majority of people in Iceland saw their mortgages increase hugely & saving devalued. Do you think they care what the GDP growth rate is?

A good point. On that note, might anyone have any information about what's happening in Iceland away from GDP figures and economists' rhetoric? That is to say, how are things going for the "average" Icelandic?

air

I was there a few weeks ago and they seem a lot happier than ourselves. A lot of them had to emigrate - mostly to Norway, in order to service their debts etc but those that remain seem relatively happy. There's a realisation that they went crazy with personal borrowing etc much like ourselves but they're just dealing with it as best they can. They wouldn't have had quite the construction boom that we did so don't have to deal with the resultant unemployment from that sector either. They have far better social cohesion than ourselves for a variety of reasons, amongst them a much smaller gap between the lowest paid and the highest paid across professions.

It's a good time to visit incidentally as it's a lot cheaper now than before the banking collapse and it's an amazing place.

Good loser

If everyone in Ireland took an overnight, across the board cut of 20% in our standard of living things here might be as 'good' as in Iceland.

washman3

And their prime minister is on trial for corruption while one of ours is on tour "advising" other countries on how to manage their economies...

air

Yeah I think they have a history of dealing with hardship and are used to pulling together for the greater good etc. We have no appetite for anything approaching hardship in this country unfortunately. Our so called "austerity" to date is a joke. Nothing will ever change here while we have a political system that encourages politicians to make decisions purely on the basis of what will ensure their reelection rather than for the long term good of the country.

Cianmcliam

The UK were taking legal action against Iceland for letting its banks fail though that could have seen a very large debt per capita burden, has this been concluded yet?

Count Dooku

Good loser wrote: »

If everyone in Ireland took an overnight, across the board cut of 20% in our standard of living things here might be as 'good' as in Iceland.

It will be soon cut of 20% in standards of living things here, probably even more
Difference between Ireland and Iceland will be that Iceland got that immediately and now on way to recovery, while Ireland sold its recovery on order to prevent short term pain

sarumite

I wonder how many ghost estates there are in Iceland?

air

Zero as far as I saw, they don't really do housing estates, even in Reykjavik pretty much all the houses are one offs and outside the city centre they tend to be on large individual sites. Hence there is a large urban sprawl and very low population density even within the city limits.

Head The Wall

RichardAnd wrote: »

A good point. On that note, might anyone have any information about what's happening in Iceland away from GDP figures and economists' rhetoric? That is to say, how are things going for the "average" Icelandic?

Their unemployment is currently at 7% which seems low compared to us but it usually ranges from 2-3 percent and peaked at 9% which was a three fold increase in unemployment much the same as we are at now.

Fattes

OP you are excluding a few pillars of the Icelandic government policy.

- Massive Austerity implemented across all Gov spending

- A 80% increase in the tax base

- Stringent Capital controls on the amount of cash you can remove from a bank at any time.

But other than that the economy is rocking.

Tabnabs

Here's an interesting recent story:

The former chairman and the former CEO of the Icelandic Byr Savings Bank have each been sentenced to four-and-a-half years behind bars after being found guilty of fraud. The country’s Supreme Court found that Jon Thorsteinn Jonsson and Ragnar Zophonias Gudjonsson abused their positions as executives at Byr when granting an ISK 800 million (EUR 4.9 million) loan to Exeter Holdings ehf, just as the Icelandic banking system was on the brink of collapse in 2008.

Exeter then used the loan to buy Gudjonsson and Jonsson’s shares in Byr, before putting them up for sale as a collateral guarantee for the loan.

A ruling posted on the Supreme Court’s website said the sentences were harsh because the “magnitude of the offences was significant”. It continued that Gudjonsson’s “infraction was committed under the auspices of his mandate” as Byr’s CEO, and that Jonsson’s action “relieved him from personal guarantees on loans”.

Read more: http://www.icenews.is/index.php/2012/06/15/former-icelandic-bank-execs-jailed-for-fraud/#ixzz1xwuRqkaC

Of course, nothing like this would ever happen in Ireland, oh wait...

Their emigration isn't quite so bad as ours though.

Iceland Among Most Emigrated From
15.6.2012
Words by Paul Fontaine
Iceland is among the top countries in Europe that people are moving away from, although still to a relatively small proportion of the population as a whole.

As reported, early 2009 saw many news reports of Icelanders fleeing the country in search of a better life elsewhere, most notably in other Scandinavian countries. However, Vísir reported that when looked at within the context of Icelandic history, emigration from Iceland this time around has been relatively light.

RÚV now reports that another context within which to look at emigration statistics - other European countries - puts Iceland near the top of the list.

The French-German show Arte pointed out that the country with the largest percentage of the population leaving was Ireland, at 1.6%. This is followed by Lithuania (1.5%), Iceland and Greece tied for third place at 1.3%, and then Spain and Portugal at 1%.

At the same time, Statistics Iceland reports while about 1,230 people have moved out of Iceland in the first quarter of this year, a great many of them are citizens of foreign countries. The number of foreign nationals leaving Iceland has actually increased between 2011 and 2012, while the number of Icelanders moving away has declined.

Þóra Ágústsdóttir, the project manager of the European department of the Directorate of Labour, said there has been neither an increase nor a decrease in the number of residents of Iceland seeking work abroad.

http://grapevine.is/News/ReadArticle/Iceland-Among-Most-Emigrated-From

But overall, the media, at least, isn't particluarly preoccuplied with hard luck stories for the average citizens

http://www.mbl.is/frettir/english/

NakedNNettles

Yeah, Iceland is doing great....with their massive population of 320,000.

Hey, if many more of them leave there won't be anyone left to run the country. :rolleyes:

They don't do ghost estates just ghost cities.

NakedNNettles

NakedNNettles wrote: »

Yeah, Iceland is doing great....with their massive population of 320,000.

Hey, if many more of them leave there won't be anyone left to run the country. :rolleyes:

They don't do ghost estates just ghost cities.

Do you have a link to any of your phantom ghost cities?

djpbarry

RichardAnd wrote: »

On that note, might anyone have any information about what's happening in Iceland away from GDP figures and economists' rhetoric? That is to say, how are things going for the "average" Icelandic?

Until recently they had massive inflation - peaked at almost 12% in 2008 I think. Anyone with decent savings would have taken a pretty severe hit.

creedp

djpbarry wrote: »

Until recently they had massive inflation - peaked at almost 12% in 2008 I think. Anyone with decent savings would have taken a pretty severe hit.

I would have thought that inflation of that scale would be most problematic for the ordinary Joe worker .. presuming he didn't get commensurate pay increases

djpbarry

creedp wrote: »

I would have thought that inflation of that scale would be most problematic for the ordinary Joe worker..

Oh sorry - I forgot that "ordinary workers" don't have savings.

air

There is no doubt that they are facing a decreased standard of living, pay cuts, emigration and inflation. However tough choices have to be made by any country that wants to get out of difficulty. I think Iceland have the right idea in terms of tackling the problems head on and dealing with them straight away instead of borrowing to extend and increase the pain over the long term.
Our own non attempts at tackling our annual budget deficit are laughable, 5 years into recession we should have at the very least balanced the books by now and be on our way to repaying our debts.

senordingdong

Head The Wall wrote: »

Their unemployment is currently at 7% which seems low compared to us but it usually ranges from 2-3 percent and peaked at 9% which was a three fold increase in unemployment much the same as we are at now.

Yes but that's 7% of a poulation that is only 320,060.

It'a good that there is growth but I understand that the average Icelander was hit very hard to get to where they are and there government, might be a little less of a joke than ours.

ninty9er

Of course they wouldn't have anything like a property bubble to deal with either

http://www.bloomberg.com/news/2012-05-29/iceland-property-bubble-grows-with-currency-controls-mortgages.html

Iceland’s crisis-management policies are creating the island’s next property bubble less than four years after its banking meltdown threw the economy into its worst recession.

Prices for new homes touched a record last quarter, having surged 40.1 percent since the final three months of 2010, according to estimates by the National Registry of Iceland in Reykjavik. Average house prices have risen 11.3 percent since the market bottomed at the end of 2009, according to central bank data at the end of the first quarter.

Currency controls imposed in 2008 and designed to protect the island of 320,000 from a mass capital exodus are now channeling funds into a market that is showing symptoms of overheating and driving home-loan debt higher. Close to $8 billion in kronur are held by offshore investors unable to get their money out of the country, according to Arion Bank hf economist Thorbjorn Sveinsson. As the government signals restrictions will remain until at least 2015, funds are flowing into one of the few longer-term investment options: real estate.

“If the development continues without interference, this will lead to a property bubble within the next two years,” Asgeir Jonsson, an economist at Reykjavik-based asset manager Gamma, said in an interview. “There’s a greater risk of an asset bubble being created in an economy that is closed off behind capital controls.”

Outgrowing Europe
Iceland, whose 2008 banking default on $85 billion pushed the economy into a recession that lasted through the first half of 2010, is now outgrowing Europe and the U.S. Its gross domestic product will expand 3 percent this year and 3.9 percent in 2013, according to Arion. The economy of the 17 countries sharing the euro will contract 0.3 percent in 2012 before growing 1 percent in 2013, the European Commission said on May 11.

Much of Iceland’s recovery has rested with its “unorthodox” crisis management, according to Fitch Ratings, which restored the island’s investment grade credit status in February.
Iceland’s rebound is now being driven by household spending, a team of Arion economists led by Sveinsson said in a May 21 note. The central bank has raised borrowing costs four times since August, bringing the benchmark lending rate to 5.5 percent. The bank signaled this month more tightening is needed to cool the economy as inflation hovers well above its 2.5 percent target. Consumer prices grew an annual 6.4 percent in April, Statistics Iceland said April 27.

Inflation Accelerates
Faster inflation is adding to risks in the housing market as most mortgages are linked to the consumer price index, meaning debt burdens swell as inflation accelerates. Household debt grew to 270 percent of disposable incomes in 2010, according to the latest figures available from the central bank. That compares with 217 percent a year before the banks collapsed and about 50 percent in the 1980s, according to the bank.

The island’s 1 trillion-krona ($7.6 billion) mortgage-bond market is twice the size of its government debt, according to estimates by Gamma. Bonds sold by Iceland’s Housing Financing Fund make up 68 percent of the nation’s “liquid government guaranteed debt market,” Gamma economist Valdimar Armann said by phone. The yield on the benchmark 2044 HFF bond has slumped about 80 basis points to 2.4 percent since the end of last year.

Many foreign investors bypass the mortgage bond market and buy properties directly, Jonsson at Gamma said.
“Last year, investors finally realized that the capital controls aren’t going anywhere any time soon,” Jonsson said. “That has led to a change in investors perspective, and they’re now moving in greater numbers into longer assets and snapping up properties.”

Apartment Costs
An average apartment cost about 28 million kronur in May, the National Registry of Iceland estimates. That compares with 12.4 million kronur in 2001. The average Icelandic household earned about 4.4 million kronur in 2011, according to Statistics Iceland.

“The exorbitant prices in the housing market, so early after the collapse of the Icelandic economy, are quite shocking,” said Finnur Eiriksson, a computer scientist living in Reykjavik. “I’ve decided to stay in the rental market for some time to come. For anyone that has been shopping around, the drop in property prices after 2008 hasn’t been significant enough.”

Iceland stunned the world with the scale of its 2008 banking meltdown, which sent the krona tumbling as much as 80 percent against the euro offshore in 2008.

Its rapid resurrection subsequently won accolades from economists including Nobel Laureate Paul Krugman, who praised an approach he termed “bankrupting yourself to recovery,” in an opinion piece published in the New York Times in November 2010.

React to Bubble
Now, “the million-dollar question is whether the authorities should do something to react to the bubble,” Olafur Isleifsson, an economics professor at Reykjavik University, said in an interview. “For some time now it’s been expected that the 1 trillion kronur that’s locked in the market behind capital controls would eventually find its way into the property market.”
Credit-default swaps protecting against losses on Icelandic debt touched a four-month high this month, as investors signal they’re growing wary of the risks lurking in the economy.

The cost to protect $10 million of the debt from losses for five years rose to $292,515 annually, as of May 29, from $199,570 last June, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market.

The difference in default swap rates between Iceland and Germany widened to more than 210 basis points last week, the widest spread in a month.

Increased Deficits
“It’s extremely important to reduce the government’s reliance on borrowed funds, since increased deficits push up domestic interest rates and thereby make investment plans of private parties uncertain,” Finance Minister Oddny G. Hardardottir, said in a speech in parliament yesterday. Failure to do so may lead to an increase in the country’s cost of financing and pressure on the currency, she said.

The response from policy makers to the risk of a bubble is likely to be to require banks to curb lending, according to Jonsson at Gamma. That approach would still hurt homeowners, he said.

“They could do that by forcing the banks to demand higher equity from individual buyers, which would cool down the market,” he said. “At the same time, the private individuals would be the ones that would suffer.”

creedp

djpbarry wrote: »

Oh sorry - I forgot that "ordinary workers" don't have savings.

I would have thought having enough money to meet day to day expenses comes higher up the ladder of priority than wondering how my substantial savings are faring in these tough times. Maybe not though and that possibly explains how people who can't put food on the table and pay their mortgages are saving more than they ever did ..

kippy

I suspect the big difference between Iceland and Ireland is the Euro.
Nothing else.

djpbarry

creedp wrote: »

I would have thought having enough money to meet day to day expenses comes higher up the ladder of priority than wondering how my substantial savings are faring in these tough times.

So what about the "average workers" in Iceland who thought they were being prudent by putting aside a little something as often as they can to act as a nest egg for when they retire? They've just seen their pensions obliterated.

creedp wrote: »

...people who can't put food on the table...

So the "average worker" in Ireland/Iceland can't put food on the table? You'd really think something like that would make the news, wouldn't you?

NakedNNettles

Deleted User wrote: »

Do you have a link to any of your phantom ghost cities?

http://www.ipsnews.net/2009/05/iceland-living-with-ghost-towns/

creedp

djpbarry wrote: »

So what about the "average workers" in Iceland who thought they were being prudent by putting aside a little something as often as they can to act as a nest egg for when they retire? They've just seen their pensions obliterated.

OK, OK I take your point .. of course people (incl the av worker) has lost out due to the reduced purchasing power of their savings. The only point I was trying, obviously unsuccessfully, to make was that the loss of purchasing power of peoples incomes will hit them immediatley particularly if they also suffer pay reductions as is likely in a severe recession.

So the "average worker" in Ireland/Iceland can't put food on the table? You'd really think something like that would make the news, wouldn't you?

You know as well as I do that the majority of working people in this country (I don't know enough about Iceland) have not sufferred catastrophic reductions in income .. however, that's not what the Sindo and co would like you to believe. The point I was making was that if you believed to media everyone in this country is at the point of financial meltdown and therefore its not thier saving that are paramount but thier ability to earn an income to keep food on the table. OK I accept I lost my way:)

Icepick

air wrote: »

There is no doubt that they are facing a decreased standard of living, pay cuts, emigration and inflation. However tough choices have to be made by any country that wants to get out of difficulty. I think Iceland have the right idea in terms of tackling the problems head on and dealing with them straight away instead of borrowing to extend and increase the pain over the long term.

Unlike Ireland, they did not really have a choice.

Count Dooku

creedp wrote: »

You know as well as I do that the majority of working people in this country (I don't know enough about Iceland) have not sufferred catastrophic reductions in income ..

Mostly because it been delayed and it will hit them later

antoobrien

Icepick wrote: »

Unlike Ireland, they did not really have a choice.

The scale of the Icelandic problem is also vastly smaller than ours - a total of about €1.5bn loans to the IMF.

Gluteus maximus

Was in Iceland recently and it is very much a 2 tier economy.

There is an established middle class, monied up who were never really impacted upon. They are the ones benefitting from the agressive uplift, given that the y have the capital and liquidity to ride the property speculation gravy train as it overshoots up after overshooting down.

Same thing will happen here.................. (is happening already given the anecdotal reportage of NAMA sites being sold for a paltry fraction of their value).

senordingdong

Gluteus maximus wrote: »

Same thing will happen here.................. (is happening already given the anecdotal reportage of NAMA sites being sold for a paltry fraction of their value).

Yeah except these sites don't appear to be getting snapped up by a middle class, rather an elite higher class that played a large part in the demise to begin with.

It's like when communism ended in Russia.

Icepick

Gluteus maximus wrote: »

Was in Iceland recently and it is very much a 2 tier economy.

There is an established middle class, monied up who were never really impacted upon. They are the ones benefitting from the agressive uplift, given that the y have the capital and liquidity to ride the property speculation gravy train as it overshoots up after overshooting down.

Same thing will happen here.................. (is happening already given the anecdotal reportage of NAMA sites being sold for a paltry fraction of their value).

middle class?