Showing posts with label iceland. Show all posts
Showing posts with label iceland. Show all posts

Tuesday 29 November 2011

Iceland wins in the end


The OECD has come very close to predicting a depression for Europe unless EU leaders conjure up a lender-of-last resort very quickly, and somehow manage to make the world believe that the EFSF bail-out fund really exists.
Even if disaster is avoided, the eurozone growth forecast is dreadful. Italy, Portugal, Greece will all contract through 2012, while Spain, France, Netherlands, and Germany will bounce along the bottom.
Unemployment will reach 18.5pc in Greece, 22.9pc in Spain, 14.1pc in Ireland, 13.8pc in Portugal.
Yet Iceland stands out, with 2.4pc growth and unemployment tumbling to 6.1. Well, well.
Here is the box from the OECD.
Iceland's policy of drastic devaluation with capital controls has not proved to be the disaster that so many foretold. Its refusal to accept the full burden of private bank losses has not turned the country into leper-land.
The nation has held its social fabric together. Had Iceland been in the eurozone, it would have been forced to pursue the same reactionary polices of "internal devaluation" and debt deflation being inflicted today on the mass ranks of unemployed across the arc of depression.
Sorry I could not resist posting this. Shame on me.

Saturday 5 December 2009

Iceland's Near Collapse: What Can We Learn?

Iceland's Near Collapse: What Can We Learn?

by Reyna Gobel,MBA (Contact Author | Biography)

While it's common to hear of companies going bankrupt, many were shocked when the entire country of Iceland almost fell into a state of bankruptcy in 2008. How could a country get to this point? And, once there, what could be done to mitigate the problem? Read on for a cautionary tale's description of what preceded Iceland's near economic collapse.

Cause of the Crisis
During the mid-1990s, Iceland flourished. Business was booming as financial products such as bank loans, investments and entrepreneurship became Iceland's biggest export. The country's economic reach became greater than ever. In fact, when you walk into the posh Handley's toy store in London to buy a five-foot-high plush Kangaroo, you're standing in an Icelandic company's investment.

Other new things were shaping up for Iceland during this time as well. For the first time in history, Iceland established its own domestic stock market in 1985. The growing economy greatly improved income for citizens, and wages increase by 45% between 1995 and 2000.

But with much of the banks' capital being loaned outside of the country, Iceland became overly dependent on other countries' economies staying afloat and those countries' residents and businesses paying off their debt.

Iceland's problems really began when it became a victim of poor currency trading rates, called carry rates. When currencies dropped in other markets, the Icelandic krona's value fell catastrophically. (For more information on what causes a country's currency to fall, read What Causes A Currency Crisis?)

Impact on the Average Icelandic Citizen

•Skyrocketing Interest Rates. Banks and the Icelandic government - which was forced to nationalize to stabilize some of Iceland's banks - needed to raise capital. Banks raise capital either by selling stocks or bonds. Unfortunately, both options were impossible in this situation. The third option was to raise interest rates, which limits lending in difficult times and encourages people in other countries to once again invest in Iceland's banking systems in the hope of a high return on a now-risky investment. But for the average Icelander, this rate hike caused mortgage rates to skyrocket, hitting a key interest rate of 18% in October of 2008, the highest level in Europe.

•International Travel Woes. When a national currency and homeland banks aren't viewed as very stable, traveling outside of the country becomes difficult for citizens. This is because other countries will have issues with accepting large amounts of Icelandic krona as payment.

The Rescuers: The International Monetary Fund
The International Monetary Fund is an international organization of 186 countries that aims to help nations avert financial crises by providing loans to countries with balance of payment issues, along with technical assistance. In October 2008, IMF announced a $2.1 billion loan plan with Iceland with the goal of restoring confidence in the banking system. Iceland must also adhere to an IMF-supported economic program. By March 2009, conditions in Iceland appeared to be improving, although it was maintaining very stringent controls on the flow of capital. (Chances are you've heard of the IMF. But what does it do, and why is it so controversial? See What Is The International Monetary Fund?)

What Lessons Should You Learn?

•The Dangers of Unmanaged Growth. Let's say you get a huge promotion and raise at work. You look at everything you own and think about upgrading your lifestyle. Should you get a bigger house, hire a personal trainer, or replace all your clothes in one Neiman Marcus shopping spree? Before you adjust your lifestyle, you should think about how long the raise could last. Maybe you should wait a year or two and see if your higher income persists. And even if your company does well, what happens to your job when the rest of the country cuts back on expenses?

Just as with Iceland, in a globalized world, no person, company or even country is a self-contained and independent entity. Therefore, Iceland's troubles showed that thinking ahead, even in the best of times, is an important survival strategy. (For related reading, check out The Globalization Debate.)


•One Country's Problems Can Impact the Global Economy. In a world where global economies are as important as national economies, one country's woes can either echo across the world, or the world's woes can encroach on any country worldwide. Iceland's banks had account holders and investors in a variety of countries shivering out of fear of losing their money. (For information on the global economy read Taking Global Macro Trends To The Bank.)


•Government Oversight of the Banking Industry. After the U.S. credit crisis of 2007-2008, mortgage rates didn't rise above 18% as they did in Iceland. However, pension and mutual funds dropped rapidly in value, home foreclosure rates skyrocketed and banks lost money to the extent of needing federal bailouts. The situation in Iceland questions the balance between a deregulated banking system and securing the stability of financial institutions that provide most of the funds for citizens' personal and professional lives. Iceland's crisis, as well as the one in the U.S., suggests that a line has to be drawn showing exactly when and how to intervene and stabilize a financial crisis. (To learn more, read Free Markets: What's The Cost?)

Conclusion
Iceland went to the brink of bankruptcy due to unmanaged, rapid growth of the banking industry in the mid-1990s. Icelandic citizens deal with high interest rates and some difficulty using their currency in other countries. Learn from this unfortunate event, and avoid the chill of unmanaged growth by analyzing and planning for major purchases in your own life - because you never know when a financial ice storm will hit your personal economy.

by Reyna Gobel (Contact Author | Biography)

Reyna Gobel is a freelance journalist and self-professed financial geek, who realized in her finance classes that personal finances weren't nearly as complicated as she thought they'd be and set out to spread the word.Gobel is also the author of "CliffsNotes Graduation Debt: How To Manage Student Loans And Live Your Life", which will be hitting the shelves in March of 2010.

http://www.investopedia.com/articles/economics/09/iceland-bankruptcy.asp

Sunday 18 October 2009

Iceland exposed: How a whole nation went down the toilet

From The Times
October 1, 2009

Iceland exposed: How a whole nation went down the toilet

A year ago this month, Iceland went bankrupt. We explain how it went from being the world’s happiest nation to one with a bleak future

Roger Boyes

Along a narrow strip between downtown Reykjavik and the northern coastline lies a jumble of half-built high-rise buildings that was to be the new Manhattan of the north. By Spring this year, the place had become an urban graveyard. Someone has scrawled "CAPITALISM R.I.P." on the side of one of the buildings. Squatters have moved in, converting an abandoned house into a cosy café.

The Reykjavikers cheerfully welcomed the presence of some kind of life to this ghost town. The developers, however, did not approve. So, just after Easter, the riot police were sent in with a chainsaw to hack through barricaded doors and pepper spray to disable the young squatters. The clean-up was nasty, brutal and short: it was the official end of Niceland.

The Icelandic sense of live-and-let-live was the first casualty of the meltdown. For centuries, island society had functioned on family lines. Yes, there were feuds and friction between family members, but there was tolerance too. The financial collapse, though, brought a rawness to everyday life.

While the Nordic rules still applied, no one was hustled out of the office on the day that the banks went under; no one stuffed the clutter of their desks into a cardboard box. But by November, dismissal letters were in the mail. Unemployment rose from under 2 per cent in September 2008 to 10 per cent by the spring of 2009.

Although for a decade or so Iceland had imagined itself to be at the centre of the prosperous world, the crash propelled it back into the remote North Atlantic. Its pride was hurt. Icelanders were conscious that they had been steered incompetently and corruptly into the abyss. Yet the political class showed no remorse. David Oddsson — the head of the central bank, who as prime minister had presided over the privatisation of Iceland’s state-owned banks — was quick to blame the magnate Jon Asgeir and the oligarchs; Jon Asgeir blamed both the US for letting Lehman collapse and Oddsson for not responding intelligently; the Icelandic Government blamed the British Government.

“There is no culture of ministerial responsibility here,” says a senior official. “The prime minister will say, ‘I didn’t order this, I didn’t cause that, so why should I step down?’ And since the prime minister says that, so do the ministers and department chiefs.” As a result, no one has an interest in discovering why mistakes were made. The main threads of Icelandic rule were too intertwined, matted together: remove any one of these components — say, by an ill-judged confession of incompetence — and the whole edifice was likely to collapse.

The smallness of the society increased the risks of mismanagement: the humiliation of national bankruptcy, the speed with which the middle class was impoverished, the heaviness of personal debt, the almost instant flip from being the world’s happiest nation to being a place that could offer no future to its young. So Iceland became not only the first country to go broke, but also the first in this global financial crisis to chase its government out of power.

Soon, as living standards began to fall and people took to the streets, an uprising gathered force. It became known as the kitchen revolution because demonstrators used wooden spoons to bang pots and pans to drown out the proceedings of Parliament.

These protests had plenty of pathos, above all, the singing of the rather dirge-like national anthem. Mainly, though, this was an ironic revolt. Fake banknotes bearing the image of David Oddsson’s head were distributed, free of course, since he was widely seen as having betrayed the krona.

In December, Gurri, one of Iceland’s many self-proclaimed witches. led protesters toward the central bank and entered the building, carrying a life-size effigy of David Oddsson. Repelled by police, the short blonde witch, dressed of course in black, started to spank her effigy —“You’ve been a bad boy!” — pronounced a spell, then stuffed it in a garbage bag.

Until this moment, Iceland’s protest movement was an expression of hurt and an inchoate demand for change. Its ironic undertone was in part because many in the middle class, now being squeezed between higher mortgage debt and lower real wages, were half-aware that they had allowed the political class to get away with their incompetence and bad deals. Now they were demanding that the same class be changed, yet no party was completely untarnished by the years of easy credit.

On October 24 the Government formally asked the IMF for help, both to send a signal to other nations and to stabilise the currency. There was no rush to help: Britain and the Netherlands were adamant that there should be no IMF package until they secured guarantees from Reykjavik to compensate Icesave depositors. Geir Haarde, the Prime Minister, eventually agreed because he had no choice: without the IMF loan of $2.1 billion, Iceland was finished. On November 16, Iceland announced that it would comply with the EU Deposit Guarantee Scheme’s directive guaranteeing compensation for up to €20,877 [£19,000] for each savings account.

The horse-trading showed the Icelanders that their Government had no choices and could not in any rational sense be described as a government any more. More than 50,000 people had their savings wiped out. The Salvation Army hostel began to fill up with families unable to make ends meet.

Car loans became like some obscure punishment from hell. Taken out in foreign currencies, the loan had to be paid back in a krona whose value was shrivelling by the day. The only way out of the squeeze was to take out a newspaper advert offering thousands of dollars to anyone willing to take on the car and its bulging debt. “The Range Rover and other SUVs have gone through an incredible transformation,” a sociologist tells me. “First they were luxuries, then they were necessities — and you can see the point, you really need off-road vehicles in Iceland, it’s a rugged place — and now they have become burdens.” In the two months after the meltdown, Icelanders had been in shock, and the shock had atomised the island. The traditional solidarity of Christmas and the long holiday mutated into political solidarity — and contempt for the seemingly guilty silence of the political class. When the demonstrations began in the new year, the tone was different. The aim was clear: to bring down the Government. Now, for the first time, the politicians began to understand what was at stake. They were not being barracked by communist agitators but were being brought to account by a nation.

Those in power thought they were being confronted by lynch justice and allowed the riot police almost a free hand to defend the institutions of state. Those demonstrating outside began to sniff every hint of weakness. There were many such pointers. Politicians were buckling under ill health. The Foreign Minister Ingibjorg Solrun Gisladottir, head of the Social Democrats, had been absent for most of the crisis because she was being treated for a brain tumour; President Ólafur Grimsson underwent heart surgery; and Haarde announced that he had cancer of the oesophagus. The demonstrators saw weakness politically too, of course. Iceland looked rudderless, with the Parliament coming back from its Christmas holidays on January 22, after what might seem to have been an unusually long break in the middle of a world crisis.

That day Haarde addressed [Parliament] in his first detailed account of what the Government had been doing since the October meltdown. It did not seem like much. Measures had been introduced, he said, to ease the pain of those tumbling into debt. Housing funds were to go easy on loan defaulters, child allowance was to be paid every month instead of every quarter, the unemployed were to be encouraged to study, employers nudged into offering part-time work instead of firing staff. Haarde stretched it out into a catalogue of 15 points, but it amounted to a wish list.

None of this pleased or satisfied the protesters. The rallies grew and grew. The protesters banged tom-toms and lit effigies of politicians until late in the night. There were no more vague demands for apologies. “What do you want to happen next, after they’ve gone?” I asked the people in the crowd that January, and did not get a coherent reply. Some wanted a return to “fairness”; the more radical were so enraged that they went so far as to demand a kind of Nuremberg trial, with Haarde, Oddsson and the oligarchs jailed on charges of defrauding the nation.

“This economic crisis has hit us with the force of a war,” said the novelist Einar Mar Gudmundsson. “It will cost us more than a war, not just in lost wealth, but in people — we will lose a generation, maybe two, to migration.” By January, having just had his cancer diagnosis, Haarde realised that he could no longer convince the nation that he was indispensable to its resurrection.

It was time to go. On January 23, a Friday and the end of a long, noisy week of public protests, Haarde announced early elections and said that, for medical reasons, he would not be running. That was not exactly the triumphant defenestration that the protesters had been hoping for. The announcement of his illness — he left the country within days for treatment in Amsterdam — confused the protest movement and the country.

“The first political casualty of the global crisis!” was the headline in Britain, but in Iceland it did not seem like that. “There was just a kind of emptiness,” recalled Magnus, an economics student. But the crumbling of the establishment had begun.

The interim government, intended to steer Iceland toward the election, was to be a coalition of Social Democrats and the Left Greens, led by the dour Johanna Sigurdardottir. Johanna, nicknamed Saint Johanna by Icelanders, was different. She was from the left of the Social Democrats, and had been pushed aside in the contest for the party leadership in 1996 (leading her to declare: “My time will come”). During election campaigns she would go to the huge dockside warehouse that housed Reykjavik’s flea market. Next to the dried-fish stands, a scruffy café, much favoured by the down-and-out, is warm, cheap, and only three minutes’ walk from the Salvation Army hostel. Johanna would sit there and listen to their complaints and those of anyone else ready to draw up a chair.

Johanna was not only the island’s first female prime minister, but also the first openly gay national leader in the world. Her relationship, in an officially registered union with the journalist and children’s book writer Jonina Leosdottir was well-known to Icelanders but attracted little curiosity. With only one gay bar on the island, Icelanders do not stay in the closet long. But to non-Icelanders Johanna’s sexuality seemed important, a sign of a more fundamental shift in attitudes. Half of her Cabinet were women — not unusual in Nordic societies — and more significant, the heads of new versions of two of the banks were women: Elin Sigfusdottir at New Landsbanki and Birna Einarsdottir at New Glitnir. Their brief was to create domestic-deposit bases, make a go of shaping a conventional, customer-oriented bank and allow the formerly glamorous and now ruined international departments to sit in a kind of toxic-waste disposal unit.

The only Icelandic investment company to emerge from the crisis relatively unscathed was Audur Capital, set up by two women, Halla Tomasdottir and Kristin Petursdottir, to cater to female investors. “Our ground rule was simple,” said Halla Tomasdottir. “We didn’t invest in anything we couldn’t understand.” In a sense the supposedly new orientation toward women echoes the Viking tradition, when the men would disappear out to sea for weeks on end, leaving women to run the households.

The Icelandic approach to dealing with the crisis, essentially to let the women clean up after the party, is part of a broader feeling, though, that the Age of Testosterone may be coming to an end in the financial sector. Blaming the crisis on endocrinology is of course absurdly reductionist.

At the heart of Ms Sigurdardottir’s shift for Iceland was not her feminism but a basic egalitarianism. Iceland had for centuries been a society without large income differences, that treasured literacy, socialised health care and equal access to nature and its resources. Indeed, when David Oddsson took over the prime ministership in the early 1990s, Iceland bore a strong resemblance to a socialist society.

Johanna Sigurdardottir put egalitarianism back on the agenda; her promotion of women was not supposed to right some ancient wrong, a discriminatory imbalance, but rather ease the way back toward a society that treasured solidarity. Women understood Johanna’s aims better than men and confirmed her in power in the general election on April 22. By that time, after only a few months in government, Johanna had convinced society that it had to reach deep into itself and fish out special Icelandic virtues: modesty, hard work, a rugged respect for each other.

That was not enough, however, to dispel the anger, the sense of betrayal. On election day, protesters broke into the villa of Bjorgolfur Thor Bjoergolfsson in Frikirkjuvegur, Free Church Street. Thor had bought the house from the city council years earlier. The villa had belonged to his great-grandfather, who had founded one of the country’s most influential trading dynasties. Since Thor was ensconced in Holland Park, London, the protesters were able to climb on to the front balcony of the house, hang some life-size Viking dolls from the balustrade, and hang a banner declaring: “We were never elected to any office, yet we ruled everything”. The sentiment was shared by the voters, who elected the Social Democrat and the Left Green parties with a huge majority.

Seven months after the meltdown, Iceland was still a seething, frustrated, unhappy nation. A friend of mine encountered a normally mild old woman as she left city hall after casting her vote. “What were these people thinking when they bled their own country dry?” the woman said. “They will never be able to show their faces in this country again, nor will their children, or their children’s children.”

Gurri, the blonde witch, could not have produced a better curse.

Meltdown Iceland by Roger Boyes is published by Bloomsbury on October 10 at £12.99. To order it for £11.69, including p&p, call 0845 2712134 or visit timesonline.co.uk/booksfirst

The way the crash happened

September 2008: Seven months after reports that Kaupthing, Iceland’s biggest bank, is seven times more likely to go into administration than a typical European one, the Icelandic Government introduces emergency legislation allowing it to nationalise Iceland’s third largest bank, Glitnir.

October 2008: Iceland takes control of Kaupthing, after Alistair Darling invokes anti-terrorism laws to freeze its UK assets. British institutions and individuals scramble to recover their savings (local authorities alone had deposited £900 million into Icelandic banks). The BBC business editor Robert Peston writes on his blog that Kaupthing has “the worst case of financial BO I’ve encountered”.

November 2008: The IMF approves a $2.1 billion (£1.4 billion) loan to Iceland. Its inflation soars to 17.1 per cent.

January 2009: Protesters surround Prime Minister Geir Haarde’s car and pelt it with eggs. He resigns.

February 2009: Iceland’s Government tries to sell its embassy residences for a total of £25 million in an attempt to raise capital for the cash-strapped country.

April 2009: A centre-left coalition lead by the interim PM Johanna Sigurdardottir wins a majority of 34 out of 63 seats at the parliamentary elections.

June 2009: A consortium of four Icelandic banks buys West Ham United from Bjorgolfur Gudmundssonm, who lost a fortune when Landbanksi went into administration.

July 2009: Iceland applies for EU membership. Documents released by the Icelandic Government reveal that the British and Dutch authorities held a meeting in 2006 to consider what would happen if the Icelandic bank Landsbanki could not cover the deposits of British and Dutch savers.

August 2009: Iceland annual birth rate experiences a 3.5 per cent hike.

Sarah Haines

http://women.timesonline.co.uk/tol/life_and_style/women/the_way_we_live/article6855928.ece