Monday, 27 April 2009

Skating on Green Ice


Last time I looked, the average Icelander was 30,000 euros in debt and the IMF was predicting the national economy was due to shrink by 10% this year. The numbers may have shifted a little since then, but I doubt the general picture has. The default assumption amongst this tiny nation of 300,000 people is that they need someone to rescue them, or at least share the burden of this unimaginable level of debt. Few seem prepared to actively embrace default, as Michael Hudson advises. The room for manoeuvre for any Icelandic government at this point may be very limited indeed.

Which is why it’s only two cheers from me at the news that a Social Democrat/Left Green coalition has won the Icelandic elections? The basic tension in this coalition is around whether or not they should open talks with the EU about prospective membership - the Social Democrats are in favour, the Left Greens against, although their strength of purpose is crumbling and their formal position is that they want to see a referendum before any such talks are entered into. The guy gagged and tied onto the back of the bus in the cartoon is Steingrímur J. Sigfússon, chairman of the Left-Greens and finance minister.

I've only seen a fraction of the debate in Iceland as I'm a monoglot. But it does seem to me to be an argument devoid of any doubts about whether the EU - and, more to the point, the European Central Bank, masters of the Euro - would accept them under any better conditions than on offer from the IMF.

Larry Elliot points out this morning that,

"...the losses made by the banks have not gone away; the debts have simply been shifted from the private sector to the public sector. A potential meltdown in the global financial system last October was averted, but only at the risk of ­creating a sovereign debt crisis.

It would only take two or three of the emerging economies of Eastern Europe or Latin America to default on their debts to see doubts surface about the viability of the bigger developed economies, including Britain. The idea that the next big shock will come in the emerging markets is plausible, because these countries have been heavily dependent on foreign capital, and those flows have reversed as banks have repatriated what's left of their capital."

Basically, Iceland is already at the point where bank default merges into something that is, in all but name, sovereign default. Given it's so small, there is a case for rescuing it. But the ECB have got to be worried about precedent - if they rescue Iceland on overtly favourable terms, how can they not do the same to the Baltic countries, Hungary or even Ukraine if they go belly up?

Blogged with the Flock Browser


  1. I do wonder what the way out for Iceland is.

    I'm not sure that Euro membership is the solution, but EU membership alone might help.

    I suspect if Hungary wasn't a member it would have gone the way of Ukraine.

    That said it might be a case of closing the barn door after the horse has bolted.

  2. Duncan,
    Michael Hudson's article advising them to take a 'Can't Pay Won't Pay' line ( is very compelling for a old lefty like myself, but I'd be interested in the opinions of people less economically illiterate than me. Whether Iceland could pull it off I'm not sure. Failure might see them reduced to eating grass I suppose....

  3. Iceland has two industries. Banking, and fishing.

    Banking's stuffed.

    If they join the EU, so's fishing.

    There, really, is the problem. Can they survive as a holiday resort on the marginal benefit the Euro would bring to their tourist industry? Probably not - too cold and dark for too much of the year.

  4. In the case of Iceland, I have time for the 'can't pay, won't pay' line.

    The precedent I would be studying:

  5. Yes, Malaysia 'got away with' capital controls and blowing a huge raspberry at the IMF. There are other examples of debt write off of course - Hudson is fond of historically analogies, e.g.:
    "The most famous modern example of an economy-wide debt cancellation is that of Germany in 1947. The Allies cancelled German personal and business debt, on the ground that most were owed to former Nazis. The only debts left on the books were current wage-debts that employers owed to their work force, and basic working balances for companies and families.A generation earlier, in 1931, the Allies wiped out Germany’s reparations debt stemming from World War I, and negotiated a moratorium on their arms debts to the United States. The world’s leading governments realized that keeping these debts on the books would collapse the global economy. But by the time they reached this conclusion it already was too late. ...the reparations debts imposed by the Allies ....was one of the major factors pushing the world into a depression."

    I hope Iceland's small size will help it - because The Powers That be will treat it as a footnote. But I fear they will be all too conscious of the possibility of it serving as a precedent. They're not ready to forgive debt generally, that's for sure.& I doubt Iceland has the wherewithal to 'do a Malaysia'.