Sunday, February 10, 2013

Iceland Takes a Different Course

We are perhaps all familiar with the meme in which Icelandic President Ólafur Ragnar Grímsson says that Iceland has been successful because it "Bailed its people out and put its bankers in jail". However, beyond the meme, what did Iceland's policy response actually look like?

As a result of Iceland's banking crisis, the country's sovereign debt stood at a staggering 240% of GDP. As Iceland's economy collapsed, the country suffered a 6.7% GDP contraction in 2009. Since then, sustained GDP growth between 2.5% and 3.0% has made-up for lost ground. 

In 2009, President Geir Haarde was indicted along with the CEOs of Iceland' three largest banks, Glitnir, Kaupthing, and Landsbanki. Thereafter, Iceland's policy response was partial forgiveness of home-owner debt, currency controls to contain risk, and a takeover and re-establishment of the domestic operations of Iceland's three main banks. According to Fitch's February 2012 Full Rating Report, "Iceland‟s unorthodox crisis policy response has succeeded in preserving sovereign creditworthiness at a price; capital controls continue to block repatriation of USD3bn- 4bn of non-resident investment in ISK instruments". Due to measures taken by Iceland, it has been largely unaffected by the Eurozone crisis. According to Fitch, Iceland's sovereign debt returned to investment-grade a year ago. Furthermore, future sovereign risk is considered minimal. 

In this clip, President Grímsson (Haarde's successor) was briefly interviewed at Davos. He cautions against a financial system combining privatized profits and tax-payer held losses, which bailing out the banks has led to. 

Last month, Iceland won a case at the court of the European Free Trade Association over disputes concerning tax-payer funded outlays to UK and the Netherlands stemming from collapse of Iceland's main banks, whose combined balance sheets stood at nine times Iceland's GDP.

Fitch's Full Rating Report
EFTA Court Judgement
Max Berre is an economist at the EDHEC-Risk Institute (Ecole Des Hautes Etudes Commerciales du Nord) who has worked as a sovereign debt expert at the Inter-American Development Bank in Washington and has taught financial economics at Maastricht University in the Netherlands.

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