Payments and interest on Icelandic national debts over the next 14 years will be around ISK 2,260 billion, of which the Icesave debt amounts to around ISK 289 billion – which is a smaller amount than the Central Bank of Iceland loaned Kaupthing without security shortly before the banking crash.
In the last year Iceland’s Althingi parliament has discussed the Icesave debt for at least 400 hours and the discussion has been the main news in the media most of that time. Public and political debate on the rest of the national debt has gone almost without discussion, on the other hand.
The figures of ISK 2,260 billion and ISK 289 billion were worked out by computer programmer and prolific blogger Vilhjalmur Thorsteinsson and take into account variables including inflation and interest.
His unofficial graphic representation of national debt can be seen here. Simply click on the chart to make it larger.
The categories, read left to right, mean:
Current treasury debt, local governments, energy companies,
Icesave contract, IMF loan, Nordic loan,
Loan from Poland, loans due to the banking system
This has been obvious from October 2008. I’ve posted the debt numbers here on more than one occasion. The IMF made a rough guess at the total debt in late 2008/early 2009 – they needed to do this to map out a recovery path. I’ve also given references to the sources of the figures: the Monetary Bulletin of Sedlanbanki.
This is NOT news. It is not a big surprise.
The question that I’ve posed before, and remains unanswered within the country at large, is: Why is the Icelandic nation fixated on such a small part of their debt?
It’s as if someone is dying of cancer and they are fixated by a nosebleed.
what is that huge amount to pay in 2011? Next year seems to be the heaviest of all to come until the 2023… It amazes me, how Icelandic people in charge on all fronts have mismanaged the situation… I think it would be nice to see graphically (same way as debt graphs) how and IF the situation can be managed. Isn’t the payments due in 2011 larger than the GNP of that year alone?
Like I have said it before Icesave is only a key to open the door for forign creditors to recuperate some of their money, thats why Icesave is “so important” the debt of Iceland is brutal 20 times more than Icesave, it is literally and unpayable debt for this country, Icesave, IMF, EU are one and the same, so the money owed to IMF, or Iceasve , or other forign creditors is owed to the same people, Iceland has been trying to pay desperately with Icelandic “companies” and resurces insted of money, and forign creditors dont want to accept this because as Iceland is now all this “companies” are worth nothing, because nobody will invest one cent in Iceland, “BUT if you accept Icesave, we create a trust atmosphere, then we can accept your companies(forign creditors) and resources(EU), you can say in the news that forigners are willing to invest in Iceland(when in fact we are just taking over),loans(forign Currency) will flow into the country, you will be able lift the currency restrictions and then we can pull out of the country as much money as we can to try to recuperate at least something from that money you owe us”.
Thats why Icesave is so important for “UK and Dutch” because this small thining has been used internationally as a meassure of Icelands trustworthiness, so if Iceland is worthy, whatever companies or resources are left will be also of some value, so they can take them in payment and try to get some money back.
>It amazes me, how Icelandic people in charge on all fronts have mismanaged the situation…
This is result of paying up after the banking crisis and that we do have the welfare state here to pay for. ( And of course nice salary of our public servants and local councillers, etc. )
Tax income from profits of the Icelandic banks did pay to quite some of those costs in years gone buy just as aluminium income has and does.
But mid-longer terms next to the figures of UK and US, Greece, and Spain we are just in fine shape.
As is abundantly clear from the magnituse of the overall national debt, Icelanders got themselves into the big mess and they have to take the consequences for electing an incompetent set of politicians who in turn appointed incompetent regulators. Did Icelanders seriously think that their massive personal increase in wealth over the past ten years was based on a foundation made of rock? Why should the rest of the World pay for that collective greed?
With a referendum on the horizon, Icesave is the only aspect of public debt which ordinary people have real control over. So, no wonder they focus on that. And it was just the same for politicians voting in parliament over the previous year. What a waste of so much neural activity.
>>>>what is that huge amount to pay in 2011? Next year seems to be the heaviest of all to come until the 2023…
Thats when the regular bonds of the Icelandic Goverment need to be refinanced.
>Thats when the regular bonds of the Icelandic Goverment need to be refinanced.
And that answers the question of why the ratings agencies’ opinions matter. Even if people are more sceptical of the validity of those ratings, it is hard to ignore the word “junk”.
“And that answers the question of why the ratings agencies’ opinions matter. Even if people are more sceptical of the validity of those ratings, it is hard to ignore the word “junk”.”
Junk bonds are not investment grade which prevents most investors from buying them. Not good if you have a lots of bonds to sell and the vast majority of investors are legally prevented from buying them
I didn’t believe you at first Peter, but you are absolutely correct. So it’s not just a negative perception, it’s a massive reduction in the potential market.
Peter – London/Krakow writes
“Junk bonds are not investment grade which prevents most investors from buying them.”
Exactly the case. Amongst the biggest purchasers of bonds are pension funds – every month these funds receive hundreds of millions of pounds/dollars/euros and they need to invest that money somewhere. Insurance companies also collect enormous amounts in premiums that need to be invested. In many countries pension and insurance funds are legally forbidden from buying “junk” grade bonds. This is one of the problems for Iceland – the biggest regular investors can’t go near the country. That’s why Iceland needs the IMF.
“Payments and interest on Icelandic national debts over the next 14 years will be around ISK 2,260 billion, of which the Icesave debt amounts to around ISK 289 billion –…… graphic representation of national debt can be seen here http://visir.is/article/20100124/FRETTIR01/134897213
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It is not the height of farce to present the national debts like that.
Are not loans taken to pay off older loans that are due to be paid up?
If iceland takes a one year loan of Eur 1bn and for each year following for 14 years it takes another Eur 1bn loan to pay back the previous years loan.
According to that graph, after 14 years it has made Eur14bn offpayments plus interest. In reality it has just paid out Eur 1bn plus interest.
According to that graph of payments, 150% of the entire GDP is paid out every year for 14 years to eliminate the debt.
Sounds like a Money Hell :)
To Knowless:
>>>>Are not loans taken to pay off older loans that are due to be paid up?
It has always been pretty clear that the large 1000M Euro loan and the two smaller 250M and 300M Euro loans due around same time will always have to be refinanced, most likely with the Nordic loans (if they arrive).
These loans were originally taken to increase the foreign reserves of Icelandic central bank, few years ago.
http://www.cb.is/?PageID=287&NewsID=1358
So you are partially correct, the later loan Nordic loans[orange]) will likely be used to pay up the earlier loan (current government loans[blue]), but the others are used for different purposes.
The other big loans Vilhjalmur’s graph displayed are the mainly related to energy companies [green] and banking system [pink], and were used to finance their activities.
>>>>According to that graph of payments, 150% of the entire GDP is paid out every year for 14 years to eliminate the debt.
GDP of Iceland is currently about 1500B ISK. The graph axis is in billions ISK, so the loan payment amounts shown there are about 10-15% of GDP each year, not 150%. We are bad shape, but NOT THAT BAD shape :-).
Perhaps Iceland should look at the whole problem differently. If Iceland manages to restore international confidence in its national finances, the only real cost of the debt in the short term is the interest. While the Icesave debt needs to be repaid by 2024, that doesn’t mean that Iceland cannot loan new money to do the actual debt payments. Then all it has to come up with by themselves is the interest. And the rest it can loan on the international financial markets again, perhaps at a better rate than the UK/NL loan. Virtually no country pays off its debts when they are due, they are rolled over by taking out a new loan that pays off the old one.
With respect to these comments about the debt repayments being over 100% of GDP – this is quite so, and quite normal.
Remember that GDP is the “turnover” of the country. If we assume that turnover is about 5% of the capital worth of the country then you can see that the entire country is “worth” about 2000% of its GDP.
Now over the years 2000-2008 Iceland (its individuals and companies, and implicitly its state) has pledged capital and productive assets as collateral for loans taken during that period. What you see in those charts is a proportion of those assets being yielded up as Icelanders fail to pay back debts taken at that time; loans taken, at root, from foreigners. The most obvious examples are the banks where Icelandic mortgages, corporate loans, etc have been handed over to new foreign owners. If a householder defaults on his mortgage his house becomes the property of a foreigner (at least fractionally!). That clears the debt and contributes to the large debt repayments you see in these charts.
To complete the point, those charts do not represent the simple situation where a proportion of someone’s productive effort is used to pay off the debt. The debt is too large for that – in Iceland’s case they need to sell a proportion of the nation’s productive capacity.
It seems to me that using Icelandic GDP obscures the debt problem that Iceland faces, since the GDP includes a large amount of business activity that generates only worthless ISK.
The problem is that Iceland does not have enough foreign currency available. Apparently Iceland imports something like $3.5-3.7 billion of foreign goods, and exports something like $3.1 billion (energy/aluminum and fish, mostly).
So somehow Iceland must find a way to increase its foreign currency earnings (by eg nationalizing the quotas to maximize currency for the government, increasing fishing, increasing taxes/rates on aluminum companies, selling off assets for hard cash – what assets?, or plundering pension funds abroad) and decreasing domestic consumption of foreign goods (by eg reducing consumer and business use of foreign goods, raw materials and gasoline etc.)
Achieving a significant surplus in foreign currency will be very difficult, obviously. Maybe impossible. Even if Iceland achieves a surplus of $500m, that would only service a foreign debt of $10-12 billion.
Iceland is going to be forced to take extreme measures, with or without Icesave.
Really, the only hope is to join the EU, get free Euros in place of useless ISK, get EU subsidies and long-term loans, cut the “welfare state” in half, and tax the hell out of everybody. Good luck Iceland.
As I have said before, the best thing to do is to withdraw the 1918 declaration of independence from Denmark, disband Althingi, and force the Danes to take you back.
Bjarni says:
“GDP of Iceland is currently about 1500B ISK. The graph axis is in billions ISK, so the loan payment amounts shown there are about 10-15% of GDP each year, not 150%. We are bad shape, but NOT THAT BAD shape :-).
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Thanks for the clarification.
10 -15% of GDP p/a is a just a financial purgatory :)
As the terms of the unsigned Icesave bill now stand, how accurate is Vilhjalmur’s estimated ISKr289bn Eur1.5bn stretched over 14 years?
To Knowless:
>>>>10 -15% of GDP p/a is a just a financial purgatory :)
The problem is not the percentage of GDP, but rather percentage of export trade, which is the only real way for Iceland to pay for foreign currency debt. Currently Iceland exports goods for about 2.6B Euros per year and import goods for about 2.2B Euros per year. So clearly paying 1B Euros a year on average in loan payments and interest is clearly going be a bit of problem.
During the bubble years, Iceland was running a high trade deficit, but now we have a 15% surplus due to the effects of the crisis.
>>>>As the terms of the unsigned Icesave bill now stand, how accurate is Vilhjalmur’s estimated ISKr289bn Eur1.5bn stretched over 14 years?
If there are enough recoveries from Landsbanki to cover 100% of Icesave obligation, and all the recoveries come in quickly and are paid out before 2016, then Yes the estimate of 1.5B Euros is relatively accurate. But none of these assumptions are supported by the winding-up board of Landsbanki that puts out regular reports here:
http://www.lbi.is/creditorinformation/creditormeetings/
According to the last reports, the recovery rate is estimated to be 88%, and only 70% of the recoveries will actually be paid out before 2016. Furthermore, the winding-up board does not intend to start making any payments from the bankruptcy proceedings, until after all legal challenges have been resolved. This places the earliest time for starting making payments sometime around 2011. If these assumptions are more accurate, the likely Icesave guarantee payments will increase up to about 2.1B Euros.
Vilhjalm Antonsen of Norway writes :
>Iceland is going to be forced to take extreme measures, with or without Icesave.
Really, the only hope is to join the EU, get free Euros in place of useless ISK, get EU subsidies and long-term loans, cut the “welfare state” in half, and tax the hell out of everybody.
Or find a way to increase our exports. This nonsense about EU member ship helping us is false. It simply wont help.
The only way it to find a new thing to sell that people in rest of world do want and will pay us they EUR and USD etc for. Good news is there is plenty here in coming years of that.
Repaying loans doesn’t automatically mean you need foreign currency. You can always roll over part of the debt, and the Icesave deal includes a 7 year grace, doesn’t it? Of course rolling over debt requires confidence in the financial stability and trustworthiness of a country, and unfortunately Icelands current attitude doesn’t inspire much at the moment.
And on the subject of earning foreign currency, you don’t just earn foreign currency with exports, you can also earn it with foreign direct investment. I.e. find a few foreign companies who want to invest in Iceland, for example in its geothermal energies. They pay you a lot of money for that, which you can use to pay debts and/or interest.
To Leo:
>>>>You can ALWAYS roll over part of the debt, and the Icesave deal includes a 7 year grace, doesn’t it?
>>>>Of course rolling over debt REQUIRES CONFIDENCE in the financial stability and trustworthiness of a country, and unfortunately Icelands current attitude doesn’t inspire much at the moment.
Aren’t those two sentences in conflict with each other (emphasis added by me).
The grace period, simply means we do not need to worry about paying the Icesave debt for 7 years, while it collects additional 1.5 – 2.0B euros in interest. What we do worry about, is what happens when we finally need to pay all that interest.
After the collapsed of the banks due mainly to the Icesave unsecured loans, these was aggravated by other smaller business establishments operating and financed outside of Iceland, the transfers, the secrecy regulation, camaraderie of some politicians and bankers, prevelance of personnal interest and without due consideration for the majority who are now the collateral.
It must be remembered that when meetings of the Icesave was first made, the first 400 hours, the general majority, the collateral was ignored and forgotten and so was I and other few gratefull, that the President, Olafur Ragnar Grimsson have veto the proposal. Now, with eyes wide open let us focus on our mutual survival and common benefit.