Iceland’s parliament sat late into the night yesterday discussing an emergency bill on further tightening of the currency exchange market.
The bill was passed around midnight and was set into law in time for the markets to open this morning. A central provision of the new law is that export trade shall always be carried out in foreign currencies, which Icelandic companies will then have to exchange into Icelandic kronur when they bring it into the country.
There were already barriers in place to prevent the removal of foreign currency from Iceland following the currency collapse last autumn; but a two-tier system had developed whereby some exporters had managed to exploit a loophole in the law, Forbes reported.
By accepting ISK for their goods on foreign markets, exporters have been able to bypass the law and get proportionately more money at the end. They will now have to bring their foreign currency home and exchange it.
The law was passed following a significant slide in the value of the krona over recent weeks and made it through parliament with the support of every party except the Independence Party. Independence Party MPs abstained.
It will remain in force until the end of November 2010.
http://www.forbes.com/feeds/ap/2009/04/01/ap6239196.html
i.e. they didn’t foresee that the fishing industry wouldn’t want to subsidise the fixed exchange rate?
Anyone know why the IP abstained?
A loophole they didn’t foresee? Give me a break !!! Everybody knew about it…
The rigged exchange rate isn’t working, is it?
In the end, I don’t see any alternative to Iceland declaring itself bankrupt, repudiating its foreign debt, and starting all over again. The burden is just too big for 320,000 Icelanders.
I bet the people who got Iceland into this mess have made sure that, financially, THEY are all right.
OH MY GOD !! WHAT IS THIS COUNTRY THE URSS AGAIN??
WELLCOME TO THE THIRD WORLD ICELAND… NOW IT IS CLEAR THIS COUNTRY IS IN COMPLETE RUIN. ICELAND IS BANKRUPT.
HAVE YOU ALL REALIZED THAT THERE IS NO FREE MARKET IN ICELAND?? IF YOU LIVE IN ICELAND YOU CANNOT BUY EUROS, DOLLARS, NO FOREIGN CURRENCY…
KAMON, WHAT IS THIS ? CHINA? EX-URSS SYSTEM??
THINGS HERE ARE ONLY GETTING WORSE AND WORSE… THEN THEY SAY IT IS UNTIL NOVEMBER 2010??
THEY HAVE TO BE KIDDING!!
THIS COUNTRY IS JUST LIKE RUMANIA OR BULGARIA BEFORE THE ARRIVE OF DEMOCRACY… SO ICELANDERS ARE GOING TO SURVIVE ON FISH AND LAMB MEAT?? WHAT ARE THEY GOING TO IMPORT?? PEOPLE HERE WON´T BE ABLE TO BUY ANYTHING FROM ABROAD!!!
THIS IS NOW POSSIBLY THE POOREST COUNTRY IN EUROPE, EVEN MORE POOR THAN ANY EASTERN EUROPEAN COUNTRY…
START ORGANIZING THE INTERNATIONAL HELP. WE ARE GOING TO NEED IT HERE…
HOW ARE ICELANDERS GOING TO PURCHASE MEDICINES, CAR PARTS, COMPUTERS, ETC…???
THE KRONA IS DEAD, AND IS WORTH NOTHING, THIS NEW LAW IS JUST SAYING THAT. THE KRONA IS DEAD… BECAUSE IF IT WAS WORTH SOMETHING MANY PEOPLE WOULD KEEP THE MONEY IN THIS COUNTRY… BUT NO ONE SEEMS TO DO THAT
DESCANSE EN PAZ LA CORONA ISLANDESA.
AMEN
@Mike – If you aren’t able to see any alternative, then you may wish to educate yourself with the financial plan agreed with the IMF.
It’s a financial loophole that had to be closed. And, by abstaining, the Independence Party MPs merely show they’re becoming unelectable dinosaurs.
Hi Readers,
Mike Smith is getting it all wrong. The exchange rate system is going to work for sure. We are going through a very difficult period but we will survive. This is a nation of high standards and nothing will make us compromise those standards.
We think big and smart although we are only 320,000. Forward with Iceland.
Here’s a pessimistic assessment of Iceland’s currency situation by Lars Christensen, head researcher at Danske bank:
http://www.visir.is/article/20090401/VIDSKIPTI06/361545266
“No foreign investors dare to invest in Iceland with these currency controls …Iceland is like North Korea… currency controls are worrysome .. exporters always find a way around laws… Iceland has isolated itself even further … Iceland’s postion is difficult and without parallels … no easy solution out of ISK problem.”
When a central banker says that sort of thing, that means “you’re screwed”.
“”We think big and smart although we are only 320,000. Forward with Iceland.”"
The three banks are insolvent and most of the Savings & Loans
The fishing industry is insolvent
The agriculture industry is insolvent
DeCode is insolvent
Most companies are on the edge of insolvency
About 25% of home mortgages are underwater and thus insolvent
Another 10-15% of home are on the edge of insolvency
The government would be insolvent if not for foreign emergency loans.
The currency would crash and be virtually worthless if not for currency restrictions and support by the Central Bank using foreign loans. So the currency is technically worthless.
Add in 4-6 billions of euros in bond debt, another several billions for Icesave. Iceland has no way to pay this debt back, except by borrowing more money.
Iceland’s reputation is so bad that no foreigners will invest or loan, except the IMF.
If you add up all the debt owed by individuals, companies, fishing & agriculture, it adds up to 20-30 billion euros.
EU membership and the euro won’t come until at least 2013, and maybe never.
Almost everything of value in the country was looted by banker & businessmen criminals.
The political system is completely dysfunctional.
If you believe that rules, regulations, and controls conceived by central bankers and politicians are good for you, then your brain has been washed a little too thoroughly.
What would be good is if those petty tyrants would go away and let the market work out its own problems.
Quick point: Danske bank is not a Central Bank – it is a commercial bank. Danmarks Nationalbank is the county’s central bank.
But that aside, the Icelandic government is running a “false market”, in a “false economy”.
The key thing in this case is the amount of ISK OUTSIDE Iceland – and that include “ISK denominated” claims against any assets in the country. There are different types of financial claims against Iceland right now and these will attract different exchange rates because some of the claims are inherently more valuable than others. (In normal cases the exchange rate between two currencies represents an average of different types of claim – because it is taken that the currencies can be converted freely. Not so in this case – hence different exchange rates exist.)
What do I mean by “claims against Iceland”? Well, at the top of the pile – and the cause of a good deal of trouble – are foreign investors who hold bonds issued by the original three banks which are secured against specific named Icelandic assets. Such assets include Icelandic mortgages, fishing rights, factories, power plants, and income streams from future electricity sales. All these assets have an inherent value (so they will attract a good exchange rate – I can compare a house in Akureyri with a similar house in Aarhus or Malmo to get an idea of what it is worth. That comparison would yield an implied exchange rate.)
But here is the number one problem for Iceland at the moment. Law 125/2008 has attempted to sever the link between those bond holders and those assets. When the banks fell into administration those assets automatically became the property of
the foreign bond holders – that is the meaning of “secured”. However, law 125/2008 took those “domestic” assets and vested them in the “new” banks. By way of “compensation” the “new” banks have nominally issued bonds to the “old” banks up to the value of the stolen assets. And the government has said that the foreign claims can only be against the “old” banks.
No one recognises any of this.
The “new” and “old” banks are fictions, and the bonds linking them are totally meaningless.
Those “Icelandic” assets in fact don’t belong to Icelanders any more – their legal owners are outside the country.
If you can’t understand this or don’t believe it look at this recent report from Sedlabanki concerning mortgage debt relief:
http://www.sedlabanki.is/lisalib/getfile.aspx?itemid=6923
Look at the bottom of page 2 and the top of page 3. It states that any relief would need to be added to the sovereign debt because there are foreign creditors involved – these are the bond holders who actually own those mortgages. The Icelandic government cannot unilaterally write off debt – it is owed to someone and that someone has to be paid back. (The Central Bank understands the true position even if the government and people are in denial. The government just wants to give money away without any come-back from the owners of that money. The Central Banks is saying – No, you can’t do that! Those owners will object!)
There are plenty of court cases in the pipeline to re-establish correct ownership of all these seized assets.
Law 125/2008 is why the resolution committees are getting nowhere. They are caught between the Icelandic legal requirement to settle secured claims to bond holders once “fair title” has been established and the contradictory Icelandic legal requirement that forbids them from rendering up those assets to foreigners. (There are also Icelandic laws relating to equal rights and non-discriminatory treatment within the EEA which are being broken by both the government and the resolution committees.)
The IMF is getting pretty angry about this. They have insisted that Hawkpoint be used to sort out the mess.
Also the Icelandic government has been very reluctant to employ investigators to look into illegal actions because Law 125/2008 is probably the biggest financial fraud in the country’s history – it is essentially state-sponsored theft. Eva Joly may well start ripping the state to pieces!
To make Icelanders aware of how this is viewed in the wider world, law 125/2008 – while playing very well to the domestic audience – has turned the country into a pariah state.
Three similar examples spring to mind. In the 1930s the Nazis passed laws dispossessing Jews of their property (especially their businesses). Later Idi Amin in Uganda dispossessed Asians of their property. Finally Zimbabwe has seized farms from white farmers. In all three cases the governments based their argument on the fact that their countries are “special” – this is very common in Iceland right now (“Iceland is unique. We are tough. We will pull through” etc etc). And in all these cases the laws were discriminatory and relied on the idea that there were favoured or special “insiders” and reviled “outsiders”. And the economic effects were the same – they ruined the economies.
Why? Because let’s say I’m an investor looking for a new scheme to invest in. Someone comes to me and offers to set up a new “green energy” plant in Iceland. The cash flows look good and everyone will benefit. But hang on! Look what happened to the last people who entered into such a deal with Iceland – the government seized their investment and gave it away to some of the locals. Do you think I’m going to be so foolish as to invest in such a fascist xenophobic untrustworthy country in which the rule of law has so little value?
So the effects of law 125/2008 cascade downwards. What foreign exchange is flowing into Iceland right now? Almost zero. The country is only surviving through the loans from the IMF and foreign-aid donor nations. Just to drive this home to Icelanders – the food you are eating, the energy that is heating you and driving your transport (especially the fishing fleet) and the medicines used in hospitals are all being provided by the IMF (Keep saying it to yourself: “We don’t own those geothermal powerplants – they are owned by foreigners! We are paying for their heat using IMF money.”). If you want to understand exactly where you stand right now I would suggest you switch off the heating and stop eating. I think that would concentrate minds!
Let me go back to the exchange rate issue. Once the secured claims are out of the way then you have a host of other claims: ISK denominated bonds, government loans, unsecured commercial loans, equity holdings and so forth.
Now a little more “currency theory”. What does it mean (in general terms, forget the secured claims for a moment) when a dollar bill exists outside the USA? Lets say it’s in Rvik. That means that at some point in the past some Yank bought a cod off some Icelander and paid a dollar for it. Great! So the Icelander has a dollar bill in his grubby hand. What can he do with it? He can exchange it with someone else who has different currencies – but that just passes on the problem of what to do with it. Can it be used (legally) inside Iceland? No, the ISK is the legal tender in that country. So! At root the only place where the dollar bill can be spent is in the USA itself. So one day our Icelander is in NY with his bill and he buys a Hershey bar! The dollar has gone home.
In the jargon, a unit of currency outside its zone of circulation represents a claim against the future productive output of that zone. (So, within the US they **produce** Hershey bars, and the dollar in Rvik represents the future possibility of an Icelander **claiming** one of those bars and consuming it.)
The general exchange rate you see quoted in the press therefore reflects two things – the productive economic capacity of a country (which includes its capital assets) and the amount of the currency in circulation (with special regard to that circulating outside the country).
So let’s look at Iceland. Well as we’ve seen a good proportion of productive capacity of the country is already pledged to foreigners through the secured bonds. So we can’t use those to back up the general currency. What’s left? Not much, lets call it zero in fact. How much ISK is outside the country? Loads. Divide loads by zero and you get a very high number indeed!
160 ISK/euro – in your dreams.
260 ISK/euro – you will get this as an implied rate if you are an Icelander with something worth buying on the unofficial market (such as selling fish in Grimsby).
100000 ISK/euro – that’s probably nearer the correct value.
What does this mean? Well the analysis shows Iceland is bankrupt (the immediate claims against the country are beyond the value of all the future output of the country). Bankrupt means the currency is worthless. That means the exchange rate is almost infinite. Worthless means that real inflation is stratospheric.
Want an example of this? Zimbabwe.
The only difference between Iceland and Zimbabwe right now is that Iceland has an IMF loan to keep it alive.
How will this end? Nothing will happen until after the elections. The government will continue to drag its heels. The IMF will threaten Iceland with a “bad” report and the stopping of the loans (this would result in rationing of food and fuel in Iceland – foreign currency is already rationed). The government will give in. Law 125/2008 will be quietly ignored. Secured creditors will take possession of their property. Everything else will be sold (there isn’t much worth selling). Other nominally secured claims (deposits in banks) will be added to the sovereign debt. Some of the debt will be rescheduled 10-20 years into the future. Everyone else will be lucky to get 1 cent in the dollar. But at that point all the creditors will leave you in peace. (Except to chase up any funds that disappeared illegally before the crash – these will still be pursued, and will revert to the foreigners not the Icelanders. This explains why the government isn’t too bothered in pursuing that money – they are doing the dirty work for the foreigners. They get no money from it, but a good deal of “bad press” as the cases are revealed. You can understand their point of view – but again the IMF is pushing them.)
The government (playing to narrow nationalism, Afram Island!) will claim that this end result was because of the nasty foreigners (and they will target the IMF in particular) and all the well-educated but largely ignorant people in Iceland will believe them. But whatever the politics and whatever the views of the population the result will be that the country will start the long hard road of paying back the money it borrowed during the binge of consumerism by the general population (Ja, pappi, rett mer balsamic-vinegarid!) and empire-building by the commercial organisations (both done with the blessing and active encouragement of the government). Ten to twenty years of austerity are not going to be fun (Nei, mama, ekki aftur hardfiskur!).
@Kawsu Ceesay
You are just a shame for this nation its because of thinking like yours and people like yours that we are in this situation, lets see what you say when you are eating crap in a couple of months.
As always Mike, a pleasure to read your posts. Not that they’re saying what I’d like to hear, but nonetheless a pleasure.
@American
You might have noticed a small blip on the Icelandic economy’s chart. That was due to under-regulation, rather than too much regulation.
If you’re going to spew that free-market-or-death crap, it might be better to find a board not associated with a country that’s deep in the s**t because of it.
Look at Europe; look at the world. there is a silver lining for Island. first off all there
are no toxic debts in the banks; second you got the economic hit full now; so island will recover firs And what with all those complaints……………….
compare the real income per person now with the present income in the developed world. Still not too bad.
JUST MAKE NOT THIS MISTAKE: Do not join the European Union. This will be a desaster for the country.(For instance the fishing industry) Just sit out the bad times like Sweden and Finnland in the 90ts.
Feel good and keep confidance. We lost a lot of money but are still committed (With a lot of money) to Iceland on the long run. This because we
believe in the people and the country!
>first off all there are no toxic debts in the banks
Have you seen the Kaupthing a/cs?
http://www.mbl.is/media/22/1222.pdf
That’s a 66% write off. Not all toxic debt is in the US.
>Just sit out the bad times like Sweden and Finnland in the 90ts.
Too funny for words, as they both joined the EU in 1995 :D .
There are laws here in Iceland that limit foreign ownership, those laws have been in place for a very long time and where present when the first Kr bonds were issued, this law will never be changed or removed, the only way for foreigners to get ownership of companys, realestate,energy, fishing rights etc is if we decide to join EU,
hell will frease over before that happens,
until then we will write whatever laws we see fit to ensure our safety and freedom and those who dond like it can go to.. you know what i mean,
some one was talking about energy and food,
we produce 100 times more than we could ever use ourselves, the possibility of hunger or cold is a joke, the only thing we need to import is oil and thats not a problem, we export alot more than we inport, be bitter and cry if it makes you feel better, i dont care, when the banks assets are sold we will first pay all the people who lost their savings, every one else can fight over whats left, Eva Joly will respect our laws like every one else, people convicted because of her investigations will be convicted under Icelandic laws in a Icelandic court,
we have the right to defend our country against any foreign attack, no matter what it is, with laws or other means,
Iceland can be a rough place, you dont want to be here if your not welcome.
Get a brain!!! with some of that money.
ILENE SAID “compare the real income per person now with the present income in the developed world. Still not too bad”
WELL ILENE, THE ISLANDIC KRONA HAS NOW THE SAME VALUE AS THE OLD PESETA IN SPAIN 10 YEARS AGO ( IN RELATION TO THE EURO) IT COULD NOT BE WORSE. PEOPLE HERE IS HAVING THE SALARIES OF A COUNTRY THAT HAD MUCH TO DESIRE 10 YEARS AGO… BUT I CAN TELL THAT IN 10 YEARS SPAIN HAS CHANGED RADICALLY, SPECIALLY IN HIGHER SALARIES, MODERNIZATION, TECHNOLOGY, AND ANYTHING YOU CAN FIND IN THE MOST DEVELOPED NATIONS ON THE EARTH…
I JUST THINK ABOUT EARNING IN ICELAND TODAY THE SAME THAT IT WAS EARNED IN SPAIN THEN YEARS AGO…. YOU CAN TELL, ONLY THE THOUGHT IS SCARING…
BUT ALSO YOU HAVE TO ADD TO THE SITUATION THAT THIS COUNTRY HAS TAKEN VERY HUGE AMOUNT OF DEBT, IN LOANS FROM THE IMF AND WHAT IS WORSE, FROM A LIST OF NUMEROUS COUNTRIES… MOST LIKELY ICELAND WILL HAVE TO TAKE FURTHER LOANS.
APART OF THAT JUST THINK THAT 10 YEARS AGO SPAIN WAS ACCELERATING TO AN INCREDIBLE GROW AND INNOVATION OF ANYTHING THAT COULD INNOVATE. ICELAND HAS A STILL FALLING ECONOMY, INDUSTRY THAT IS OBSOLETE. DEPENDING ON FISH AND ALUMINIUM IS JUST GOING TO MAKE THINGS WORSE.
ICELAND WILL GET OUT OF THIS, WELL, THINGS AREN´T FOREVER. BUT I CAN TELL THAT IT IS GOING TO TAKE THE 10 YEARS IT TOOK SPAIN OR MORE. AND I CAN TELL, SPAIN WAS NOT IN SUCH A SITUATION. EVERY COUNTRY IN EUROPE, SPECIALLY THOSE ARISING AND BECOMING PART OF THE EU, ARE EXPERIMENTING GROWTH, EVEN IN HARSH TIMES LIKE THIS.
IT IS USELESS TO COMPARE THE SITUATION IN ICELAND TO WHAT IS HAPPENING IN OTHER COUNTRIES. THERE ARE CONEXIONS. BUT THE ICELANDIC CRISIS HAS PARTICULARITIES OF ITS OWN. THINGS THAT HAS HAPPENED HERE THAT RESEMBLES STORIES OF SOUTHAMERICAN OR AFRICAN COUNTRIES, CORRUPTION, EVASION OF HUGE QUANTITIES OF MONEY OUT OF THE COUNTRY, POLITICAL CORRUPTION, AND A LONG ETC…
TELL ME, THE RESTRICTIONS THAT ARE LAW IN ICELAND NOW, YOU DON´T SEE THEM IN EU. DO YOU REALLY KNOW WHAT IS GOING ON HERE?? HAVE YOU READ THE LAWS AND RESTRICTIONS THEY HAVE BEEN CREATED HERE??
THOSE RESTRICTIONS MAKE US SEE THAT THINGS ARE REALLY REALLY BAD HERE. THEY MAKE US REMEMBER OF TOTALITARIAN COMMUNIST ECONOMIES, WITH A NOTABLE TOUCH OF SOUTH AMERICAN-LIKE CORRUPTION AND 3RD WORLD FLAVOR…
ILENE SAID: JUST MAKE NOT THIS MISTAKE: Do not join the European Union. This will be a desaster for the country.(For instance the fishing industry) Just sit out the bad times like Sweden and Finnland in the 90ts.
LOOK ILENE, AS I SAID HERE ABOVE, ALL COUNTRIES THAT HAVE BECOME PART OF THE EU HAVE FOUND ECONOMIC STABILITY, JOINED ONE OF THE STRONGEST CURRENCIES OF THE WORLD, AND REACHED VERY SUCCESSFUL IMPROVEMENT OF THE INDUSTRY, TECHNOLOGY, EDUCATION AND ANYTHING ELSE… THEN YOU ADD THAT TO THE FREE MOVEMENT OF PEOPLE, STUDENTS AND WORKERS, AND SO ON…
EU IS GETTING ICELANDIC FISH VERY CHEAP NOW… SO IT IS NOT ALL ABOUT FISH. AS I TOLD HERE ABOVE, ONLY FISH ISN´T ENOUGH FOR ICELAND TO BE COMPETITIVE AND A COUNTRY TO HAVE A HIGH LEVEL OF LIFE, OR FOR PEOPLE HERE TO HAVE HIGHER SALARIES THAN ANYWHERE ELSE IN EUROPE.
ONLY FISH WILL LET ICELANDERS EARN SALARIES LIKE IN EASTERN EUROPEAN COUNTRIES… AND THAT IS JUST IN CASE THE LORDS OF THE SEA WOULD SHARE THEIR GAINS… OR WHAT DO YOU THINK? THAT FISH IS A NATIONAL PROPERTY EVERY ICELANDER BENEFITS OF EQUALLY?
WAKE UP ILENE, REALLY, THERE IS A LOT GOING ON IN ICELAND, LETS BE REALISTIC. THINGS WONT GET RIGHT JUST BY MAGIC.
You’re right Bromley, moreover I do know that these countries were not exactly sitting out the crisis. Finland for instance invested heavily in education, in spite of the financial problems and had lots of well-trained engineers available when mobile communication became popular in the second half of the 90-ies, making Nokia a worldwide success story.
Iceland is doing exactly the opposite, cutting spending on education.
Apart from this the crisis of the early 90-ies in Finland had a totally different nature than what Iceland is experiencing now. Several finnish banks failed, not because the financial system basically was unsound and unviable like in Iceland (I refer again to the analysis of Buiter) but because the main trading partner (the USSR) collapsed.
After Finland had been able to find new markets and trading partners and there was some recovery in the USSR the situation improved radically.
Entering the EU in fact enabled Finland to become less dependent on one trading partner and relink its trade to the more stable european markets.
Finland did not have a ruined financial system, a virtually worthless currency and an enormous debt like Iceland so the comparison does not make sense..
Sitting it out is no option for Iceland.
“sitting it out” ??? what da.. you really have to be an idiot or a looser to think like this. Or Icelandic?
An interesting long comment from Mike. I don’t agree with all its opinions, but it was interesting to read.
A large part of the kr bonds belong to Icelanders
it will be interresting to see who they are when that leaks out, the bond holders will get paid eventually but we cant pay now and wont surrender any property here in Iceland,
LB in UK has been collecting loan payments since being frozen and is now up to 50bn isk, that will be used for icesave,
we have been offered 500 m$ loan from Russia
what i would want to do personaly is to do more busyness with countrys like USA, China and Russia,
the best option would be to make a deal with USA and use the Dollar, become the 51 state even,
thats a hell of alot more interresting than becoming a part of the EU.
@Axel
We have not been offered a loan from russia, actually las week Iceland was crying for 500 million euro loan to russia and russia gave us the finger, they say to first show them how can we pay what we owe and then prove them we can pay them, dont be ridiculos. Not even IMF is lending us money at this moment the secon part of the 2.1billon loan was sopose to be here the 1st of Februar, and they didnt send them because they are not satisfied with what the goberment has been doing, they dont see that we will be able to pay, use your brain, Iceland is in debt for more that 120 BILLION euros all togahther, about 75 of that we practicly stole it from inocent people, plus there are about 6 billion euros kidnaped here inside the contry that belong to forigners. please how old are you?
Couple of downers on Axel’s post:
On the LB money:
http://www.icelandreview.com/icelandreview/daily_news/?cat_id=28304&ew_0_a_id=322270
The Russian loan hasn’t been offered yet (I think the source is Interfax, not Bloomberg):
http://www.sptimes.ru/index.php?story_id=28607&action_id=2
Mike, thank you very much for that post. Very interesting. A lot of what you say hasn’t been mentioned at all by the Icelandic newspapers, especially details in Law 125/2008.
You paint a very dark picture of Iceland’s prospects in the future, and probably correctly. Most Icelanders seem to be completely oblivious to the hammer hanging over their heads and continue to argue about all sorts of stupid, irrelevant things, like the manouevers of the political parties. Things actually look very bleak once you start looking at assets and creditor claims.
I would not be surprised if events unfolded just as you say.
However, I disagree with your general tone that Iceland is behaving “immorally” and illegally and is somehow cheating these poor foreign creditors through an act of state-sponsored theft. Everyone involved in the bank loans knew what the game was about – or should have known. What sort of banks would collateralize every last asset that they had? Only desperate banks. What sort of creditor would lend to other banks that were broke and had no lender of last resort? Stupid and greedy creditors. In the US these are called “predatory lenders”. The foreign banks either knew or should have known, in 2005 if not earlier, that the Icelandic banks were not “credit-worthy” and that they would crash (all they had to do was examine the company books). The foreign creditors should also have realized that the Icelandic government would try to resist in any way possible to prevent the claims against the banks being dumped onto the country as a whole. The international finance system stands aside and does nothing and invokes “moral hazard” when the weak lose money, but demands the “sanctity of the contract” and the “rule of law” when it favors the strong. Now that the banks have crashed, the poor foreign creditors are crying into their soup and claiming that Iceland is not playing cricket and discriminating against them. And they are using the IMF as their strong-armed enforcers.
The IMF gave Iceland $5-6 billion in loans, on bad terms, that must be paid back. In return, the IMF will twist the arms of the insolvent Icelanders so that the IMF’s “international friends” will get the maximum amount possible from all these bonds secured by assets that should never have been securitized and full repayment for Icesave. All these repaid debts could amount to $10-20 billion. If not for the IMF loans, Iceland would be in survival mode and be forced to default on all foreign claims. Who is cheating whom?
Law 125/2008 was part of this game between the Icelandic government and the foreign creditors. It may not work but it was certainly worth a try.
If Law 125/2008 and the new banks are nullified or ignored, Iceland could try various other methods to get to the same result. For instance, the Icelandic tax authority could re-examine the bank records and determine that various transactions were tax evasion schemes and disallow various write-offs and levy billions of euros tax on the banks for previous years. Tax liens have priority over all other claims, so the Icelandic government could seize any assets in the banks that it wants (for instance, fish-quotas and mortgages) and thus wipe out a lot of foreign claims.
Or Iceland could modify its bankruptcy laws. It’s clear that the main reason Icelandic home mortgages have any value is because they are recourse mortgages (ie they follow the borrower) and because of Iceland’s strict bankruptcy laws. But if it turns out that most of the mortgages end up in the hands of foreigners, Iceland could change the bankruptcy law to give courts powers of “cramdown”, the ability to re-make the mortgages, resetting them at fair value or at whatever the homeowner can afford to pay and force the foreign creditors to take little or nothing. And make these mortgages non-recourse. Or the courts could just wipe out the mortgages for 40-50% of Icelandic homeowners who are or will soon be insolvent, give the mostly worthless houses to the foreigners, and let the dispossessed homeowners could move into government owned homes and apartments. This would have the effect of wiping out a lot of foreign claims, and without having the debt reduction put on the national debt. The mortgage debt would just vanish into thin air. As for businesses, Iceland could adopt pre-bankruptcy re-organization and debt restructuring, thus forcing the foreign creditors to eat a lot of debt. Here too, the debt would just disappear into the air.
Or Icelandic courts, especially bankruptcy courts, could use their powers of contract modification to cancel the fish- or electricity-secured bonds because the contracts that formed them were fraudulent or illegal (which they probably were, the argument is too complicated to make here). The effect of cancelling certain bond contract agreements would be to give the foreigners their money back – not actual money, but first-priority claims against the remaining bank assets. All the first or high priority creditors would then fight among themselves over who gets what. The fish claims would revert to the banks, and the banks would have to write-off most of these claims because the fishing industry is itself insolvent.
@Vilhjalm. You are not makeing much sence, you are asumeing that all bonds fom forigner claims are in assets and just treasury bonds alone amount to nera 6 billion euros, according to your reazoning the Icelandic gobermet could also blew all the houses up and then the forigners couldent claim anything? or take the fish cuota documents and burn them so they can not take it? or dry up every river so the power plants will be worthless? it doesnt work like this, or we just lunch a “military” attack on every nation that wants to claim something from Iceland?. You usally make alot of sence but I desagree with you this time, no big deal, chears.
Bromley86 If Sigfusson thinks 50 bn isk is insignificant he is probably useless to us and should be added to the unemloyment record.
I wonder if a loan from Russia would be a smart move, we can ask Easy to rob 500m$ from some unsuspecting speculators or a hedge fund,
” 75 of that we practicly stole it from inocent people”
Speak for yourself Easy, i have never stolen anything in my life.
Vilhjalm Antonsen
Thanks, good to see something positive for a change.
Take heart! All is not lost. I have a scarce 50 Kr. postage stamp with an engraving of the parliment building that is worth a few dollars. I may post it to a stamp dealer and be paid in greenbacks by return mail. Iceland can survive by knitting woolen clothing, using bankers on treadmills to operate presses to print more money,roast lamb and fish (cooked by flames fueled by banknotes) aluminum housing electrically or hot water heated heated and hijacking the occasional tourist ocean liner or raiding English coastal settlements. “From the fury of the Norsemen O Lord deliver us!”
This sheds some ligth on a part of this puzzle
its in Icelandic, i will try to find this in English
http://visir.is/article/20090404/SKODANIR03/961273430/-1
this is a very complicated issue and will be dragged from one court to another for decades until it dies, by then we will have built a new system.
@Axel
about the near 75 Billion euros that we stole from the Brithis, Dutch, Germans, Belgians, Danish, Finish, Swedish, Americans, Canadians, Chinese, and maybe more!!!! and the house you live in and the car you drive and the credit card you use or the student loans you or some one in your family has access to, in some way or another has been financed with this money, so have some shame!!!!
AXEL SAID “Bromley86 If Sigfusson thinks 50 bn isk is insignificant he is probably useless to us and should be added to the unemloyment record.”
AXEL, WAKE UP!! ANY AMOUNT OF MONEY IN ISK IS INSIGNIFICANT, THE KRÓNA IS DEATH… YOU CAN PUT AS MANY CEROS AS YOU WANT… THIS IS ZIMBAWE… YOU JUST DON´T GET IT YET!!
*THE KRONA IS DEAD.
EASY, YOU SEEM TO BE THE ONLY REALISTIC PERSON IN THIS FORUM, REALLY…
I AM SO TIRED OF READING CRAZY STUFF, LIKE NEW LAWS THAT CONTRADICT INTERNATIONAL TRADE RIGHT, ETC… WE ALL KNOW THAT ICELAND IS A RUINED COUNTRY THAT IS DESPERATELY TRYING TO FIND A WAY BY CLOSING THE COUNTRY TO THE OUTSIDE… ICELAND IS REALLY FUCKED UP. THIS IS ZIMBAWE, AND WHATEVER THEY DO THEY ONLY HAVE TO CHOICES:
-FINALLY ACCEPT THEY ARE ONE OF THE POOREST NATIONS ON THE EARTH AND LIVE WITH THAT AND TRY TO MAKE A FUTURE.
OR
-KEEP BECOMING A NORTH KOREAN LIKE ECONOMIC SYSTEM (WITH HUGE DEBTS). NO ONE WANTS TO PLAY WITH ICELAND AND ITS STUPID AND INCOMPETENT GOBERN.
THE ECONOMIC RUIN OF ICELAND IS A PROBLEM, BUT THEN THEY HAVE ANOTHER PROBLEM WICH IS THE INCOMPETENT POLITICAL CLASS, THE CORRUPTED BANKERS AND ALL THE MAFIA AROUND…
THEN YOU SEE THE AVERAGE ICELANDERS MOST OF THEM STILL MENTALLY MASTURBATING THEMSELVES WITH THE AMERICAN DREAM OF BEING RICH AND THEIR HUMAN SENSE-LESS OF RACIAL PURITY.
GIVE ME A BREAK!! WHAT A PUNCH OF RIDICULOUS CLOWNS!!
I FEEL SORRY FOR SOME ICELANDERS (JUST SOME) WHO HAVE A SENSE OF HUMAN DIGNITY AND MODESTY, AND ARE HONEST PEOPLE WHO LIVE ACCORDING TO THEIR POSSIBILITIES, THEY MIGHT BE IN THE WRONG COUNTRY..REALLY
@GUS
Acctually both terms are right the krona is both DEAD and its also DEATH. Because if we hold on to it we wont even be able to by food.
How far would Iceland have to fall before it starts to let its old people drop dead in their thousands, frozen alone and neglected, like what happens in the UK after a snowfall. I suppose if the UK can tolerate millions of children living in poverty then what’s a few thousand old people dying of hypothermia.
Never fear, help is only a phonecall away for someone hungry or cold, if they have a phone, they can contact emergency Social Services, who then charge them £5 for answering the phone.
Considering the huge revenue windfall for the UK Government over the past decade from the financial services industry, how long can a person expect to wait in a queue at A&E for emergency treatment?
Is it still 6 hours?
This is a good article.
http://www.globalresearch.ca/index.php?context=va&aid=13055
Here is another one by an interesting Economist analyst David Mc Williams after a visit to Iceland.
http://www.sbpost.ie/post/pages/p/story.aspx-qqqt=DAVID+McWilliams-qqqs=commentandanalysis-qqqid=40624-qqqx=1.asp
“This morning’s plane from Reykjavik to London is full of bankers and their lawyers who are trying of get their money back.
They have no chance, because Iceland is bust. Like Ireland, some Icelanders went on a borrowing binge, buying assets everywhere. The assets have collapsed in value, the cash is gone and there is no money left to pay the debts.”
Thats about it in a nutshell.
ICELAND LIKE ZIMBAWE?? SORRY BUT I THINK IS WORSE…
By taking over the banks, the government made the citizenry pay for the bad bets of the bankers and their financier. To pay off the bad debts and the account holders, the Icelandic government took the IMF loans and, I expect, printed Krona. When fisheries and other businesses fail, the citizens don’t have to foot the bill. Why is that banks are a special case? Banks just rent money. If they fail, we can rent money from other banks. And as for deposit holders, they will more carefully review banks before giving them any money. The Iceland government should bear the most blame for the problem.
As a way around the currency controls, could exporters take payment in gold? They would then pay their employees in gold. The employees would then use gold to make purchases. Eventually gold could replace the Krona as the country’s currency. The value of the krona is going to decline either way. Might as well embrace a solution now.
I’m not partial to gold, just a real product. In essence we are all traders and we trade our goods and services for other goods and services. We would never trade our goods and services for pretty paper, otherwise known as fiat currency. Paper currency used to be a receipt for gold. Then government confiscated the gold, and now we’re all passing around receipts for nothing, and government can print all the receipts they want because they’re no longer backed by a commodity.
Let’s get back to using a commodity as money. If not gold, maybe we could use some other form product indigenous to Iceland. There could probably be a currency based on future production of thermal energy. I would work for a commitment of 1 day of thermal energy. Let’s call the new currency: thermals. Anyway, you get the point.