International law specialist at Norway’s Tromso University, Professor Peter Orebech, says that Iceland would actually be breaking EU rules by forcing its tax payers to reimburse the Netherlands and the UK for Icesave debt, which rightfully belongs with the country’s privately funded depositors’ insurance fund.
In a long and detailed article, Orebech investigates the current status of the still-unresolved Icesave dispute. The analysis is understandably complex and he acknowledges that Iceland has repeatedly promised to pay the money back; even though the terms of the repayment deal have still not been negotiated to all sides’ satisfaction.
In investigating the current situation and how it sits with Europe-wide banking rules, Orebech comes to the conclusion that because national EEA depositors’ insurance funds are financed directly by the banking industry, there is no public liability for their insufficiency in the event of a bank folding. While such funds may take private or public loans to cover the shortfall, that is not the same as a national government taking on the debt to overseas depositors directly and passing that burden directly on to its taxpayers. In fact, he says, such an arrangement directly interferes with free competition and is thus against the law.
As has been the case throughout the Icesave saga, it appears that EU law was not created to take into account the failure of a large overseas branch operating from within a small national banking industry backed up by few taxpayers. The regulation 0.15 percent payments into the Icelandic depositors’ insurance fund could never have hoped to cover the failure of Icesave (and all the other major banks) and ongoing payments into the fund to pay back the debt now (from the country’s much reduced banking sector) would take far too long.
The full article can be read on mbl.is here – but please return to this article on IceNews to leave reader comments.
As far as I can understand, he simply does not understand/discuss the Icesave problem. I think he is writing as a politican, not professor.
It is simply not understandable why a third party is being caught responsible for the second who went gambling with assets of the first.
You can call all kinds of experts to get an opinion it does not change the simple facts, it only, at best proves that common sense still works or that our political system called democracy is overrun by vulgar capitalism.
It is a sad fact that banks are now focusing on food stocks such as grain, rice and others. The prices have already risen and guess who has to pay the price this time. The ones who suffer from hunger.
If this unchecked business continues it will give way for the destruction of our long fought for freedom and democracy.
Back to the Icesave issue: Iceland should use every experts opinion it can possibly get hold of who supports this case in disfavour of the banks and in favour of simple money saving tax payers. The banking system needs to be reformed on a global scale now, not in the future.
What the professor seems to be saying is that the Icelandic banking and financial system should be made to pay back the debt. This is effectively what happens in the UK, the UK government lends the depositor protection scheme the money and a levy is applied to the banks and other financial companies, for years to come, to repay it. HMG can demand the whole repayment after a period if it desires.
There is no reason Iceland couldn’t do the same, after all it recapitalised the banks to the tune of billions of euro’s of Icelandic taxpayer money so the principle of lending to the banks to allow them to operate is already shown. The Icesave debt would therefore stay with the banks – they could of course gouge their captive market but bank customers, not taxpayers would suffer.
I’m surprised that the icelandic government hasn’t made clear that the Icelandic banks and financial companies are liable for the repayment of the ice-save debt and it is only facilitating the borrowing.
When the Icelandic people sold this bank it became a privately owned and run bank, no state guarantee came with it, had we promised to always pay every loss this bank would suffer we would have asked for considerably higher price,
there is no state guarantee, never was and never will be,
the assets ot the bank will cover this, large part of them have already been converted to cash.
To Peter – London/Krakow:
Actually, the Icelandic government recapitalized the banks to the tune of billions of KRONA’S of Icelandic taxpayer money, not EUROS.
The so-called Icesave “debt”, on the hand is all in EUROS and POUNDS, which makes it impossible for ANYONE in Iceland (government, banks, or taxpayers) to pay it back, at least until the assets of the “old” banks have been reclaimed.
The Icelandic economy is still operating under severe foreign currency restrictions, and these restrictions are likely continue on for years.
>there is no state guarantee, never was and never will be
Glad that’s cleared up then. Please inform EFTA SA :) .
“The so-called Icesave “debt”, on the hand is all in EUROS and POUNDS, which makes it impossible for ANYONE in Iceland (government, banks, or taxpayers) to pay it back, at least until the assets of the “old” banks have been reclaimed.
The Icelandic economy is still operating under severe foreign currency restrictions, and these restrictions are likely continue on for years.”
The icelandic authorities are (still are) responsible for setting up a depositor protection scheme. Your (and others) previous argument was that the icelandic state wasn’t responsible for the debt, that the banks and depositor protection scheme were responsible for everything and it was privately run. Well, is it?
Perhaps Prof Orebech should offer to undertake a ‘No win no fee’ defence of Iceland – or, ‘No win no C.V.’
>Actually, the Icelandic government recapitalized the banks to the tune of billions of KRONA’S of Icelandic taxpayer money, not EUROS.
I’ll freely admit to being pretty confused about what the IMF loan was actually used for, but if any of it was used to (effectively or actually) recapitalise the banks then whether or not that recapitalisation is denominated in Krona isn’t really important.
As I understand it, they bought the domestic savings into new banks as fast as they could.
If this hadn’t been done it would have lead to carnage, as over 90% of buisness is with cards, not paper money.
Anything else I think would have lead to total loss for everyone involved and possible destruction of the society.
Do you have a better idea on how to take on such a problem at the time?
To Peter – London/Krakow:
Yes, you are correct. The the banks are responsible for the funding of the the deposit guarantee scheme, but with an important caveat.
What you are looking for, is spelled out in the following clause of the Directive 94/19/EC:
http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:31994L0019:EN:HTML
“Whereas it is not indispensable, in this Directive, to harmonize the methods of financing schemes guaranteeing deposits or credit institutions themselves, given, on the one hand, that the cost of financing such schemes must be borne, in principle, by credit institutions themselves and, on the other hand, that the financing capacity of such schemes must be in proportion to their liabilities; whereas this must not, however, jeopardize the stability of the banking system of the Member State concerned;”
This clause is rather contradictory, as while the Directive makes it clear that the funding of the deposit guarantee schemes MUST be borne by the credit institutions themselves, the Directive at the same time requires MUST NOT jeopardize the stability of the banking system.
The Icelandic government indeed did setup a private foundation for the deposit guarantee fund, funded by the banks, in accordance to the EC Directive, when it passed laws 98/1999.
http://www.tryggingarsjodur.is/modules/files/file_group_26/log/log-98-1999-ens.pdf
To Bromley86:
As far I know the IMF loan (or at least the parts that have been delivered so far), was used to help build up the foreign currency reserves of the Central Bank. The IMF loans were only intended to be for few years, so they will all have to be paid back shortly anyway.
The recapitalization of the Icelandic banks, which amounted to approx. 300B ISK for the Central bank and about equal amount for the three “new” banks was all funded from the Icelandic government treasury, and will eventually have to be borne by the tax-payers.
“Do you have a better idea on how to take on such a problem at the time?”
Actually, almost anything would have been better than what actually happened in Iceland in Oct 2008. The emergency law that was passed with the purpose of maintaining a functioning banking system (and thus apparently maintaining savings, pensions etc and a functioning monetary system) was a catasrophe which most Icelanders don’t recognise as such because the defence of that law is always couched in terms of protecting Icelanders.
Here is an alternative scenario.
The government simply should have let the banks fail and treated the whole affair as a commercial collpase. In the normal winding up of their affairs the assets of ordinary Icelanders would have been protected to the same degree as anyone else’s. Thus pensions (as ring fenced investments), mutual funds, and savings (to the guarateed deposit extent) would have been protected by law – the banks creditors could not have touched those. True this would have put a delay on people accessing those funds but that could have been solved by the goverment acting as a guarantor for transactions backed by those assets. Thus the government could have stepped in to pay interest etc based on those assets to the individuals concerned and then simply taken up those payments when the resolution was completed. I guess somewhere in the region of 90-95% of Icelandic assets held in such protected funds/deposits would have been protected.
What about a functioning monetary system? Well, the best recent example of how to live without banks and money was Ireland in 1978. There was a bank strike which lasted many months. The first effect of the strike was that money disappeared – people hoarded it thinking that the world couldn’t function without it. How did people pay? Well, they used cheques. If I went down the pub I would pay using a cheque. Some pubs got quite sophistocated. They accepted cheques in fixed amounts (say a 5 punt cheque) and allowed that person a credit of 5 punts of drinks and food. Now the pub owner had a stack of 5 punt cheques from his customers. When he wanted to order more beer from the brewery he would countersign the cheques and give them to the brewery in payment. The brewery would accept the cheques because they were guaranteed by the pub landlord (“Sure I know Pat. He works down the local factory and he always spends a fiver down here each Saturday. I know he will be able to honour those cheques”) The brewery, having accepted the cheques, could in turn pass them on in payment for exactly the same reason. Pubs had effectively turned into banks, and the cheques they accepted had turned into acceptable money. The same happened in local shops, supermarkets, petrol stations – in any place where someone was known they could access goods and services through the use of their cheques. Even when someone wasn’t known they could use the pub landlord as a reference. So if I was paying for my car to be fixed at a garage where I wasn’t known the garage owner could phone my local pub landlord and ask for a credit reference.
So while coins and notes disappeared, a monetary system based on personal cheques replaced it.
The reason it worked was because Ireland is a relatively small country where people are known locally and their affairs are pretty transparent. Iceland would have been easier!
This is not to say that the system was perfect, or that had it continued much longer there wouldn’t have been a catastrophic collapse. The personal cheque/money system was showing signs of strain at the end. BUT it could have happened in Iceland. (Unwinding the mass of cheques at the end was a horrible process.)
In truth, in Iceland the government could have simply stepped in, seized the relatively small amounts of cash held in the bust banks (replacing them with government bonds) and then guaranteed the free circulation of cash.
By keeping clear of the banks the government would not have got embroiled in their collapse. The emergency law established the government as a sort of guardian/gurantor of the entire Icelandic banking system. Thus the actual recapitalisatsion/privatisation/non-privatistion/etc of the three banks meant that the government accepted in principle that it had a key role to play in the unwinding of their affairs. This led the government down the road of the Icesave guarantee, the discrimination against foreign depositors etc etc all of which made the entire situation complex, unclear and to this day destructive of value for ordinary Icelanders.
I have been back in Iceland on a number of occasions this year and the state of the country is pretty bad. Ordinary folk are bridling about the currency restrictions, shelves in Hagkaup are empty, the quality of the food on offer is very poor, everything is expensive for the locals, jobs have been lost, pay cuts implemented, etc etc.
One group of Icelandic financial institutions which have managed to handle their affairs well have been the pension funds. In the early days they told the government to “get lost” when they were pressurised into “helping” the country. Well done to them! But more recently the government has been force-feeding the pensions more and more government bonds. As a short-term measure for the government this is great news, but the long-term effect on the pensions of Icelanders is going to be pretty horrible since those bonds are almost worthless on the wider market.
To Axel:
While it is very clear that there is NO state guarantee on the deposit guarantee in Iceland, according to laws 98/1999 there has been no such state guarantee in the past, it is still at least remote possibility that the Social Democrats might be able to somehow pass new laws that put such a guarantee in place.
But since they are the only political party in Iceland that still supports such a guarantee, it is very a small chance of this happening, at least not as the political landscape is now.
There was a somewhat reasonable chance of passing such laws in early 2009, but due to the many mistakes, over-confidence, and in some cases sheer incomptence of all the governments involved (IS/UK/NL) and their negotiators, that chance has now unfortunately more or less been lost. Letting bad IceSave agreements go to a national referendum, where they overwhelmingly lost (92% to 1.5%), was a big political mistake that cannot easily be undone.
As always, thanks Bjarni. I suppose my point was that any attempt to maintain a certain exchange rate requires, eventually, non-ISK money. If the govenment have created another chunk of ISK, that will depress the ISK worth, requiring someone to pony up in real money. But drunk-in-charge-of-keyboard ATM, so I’m probably missing something.
While it is very clear that there is NO state guarantee on the deposit guarantee in Iceland, according to laws 98/1999 there has been no such state guarantee in the past
This seems to be totally unimportant, given where we are. That is, the government has said that they do not believe a guarantee is required but that, for the right terms, they will give it.
So, if those terms can’t be agreed, then the only question is not whether Icelanic law requires a guarantee, but whether EEA law does. The decision for Iceland then is is paying Icesave a price worth paying to remain in the EEA. The answer to that is not necessarily “yes”.
I think this will end up in court, as there is no way a fair deal can be reached when we have people who do not represent icelands interests on both sides of the negotiating table, the deals they make will always be shot to pieces,
the outcome of the EFTA court proceedings will probably depend on how much chockolade, beer and washing powder the EU offers the judges
so i would say our chances are rather slim,
a weaker iceland serves EU interests better, so i would bet on UK/NL to win regardless of what is fair or right.
I wonder if all the EU member states would be able to guarantee all deposits in event of a second crash, what would happen to the euro if the ECB is forced to be the lender of last resort to a bunch of already bankrupt banks who could not pay up, if all deposits must always be saved in all EU member states regadless of where the banks registered in that state opperates, then its possible that in a collapse we could see the end of both the EU and the euro in a very short period of time.
” How did people pay? Well, they used cheques”
The first thing that disapeared in the crash was trust, so this idea would never have worked.
“I have been back in Iceland on a number of occasions this year and the state of the country is pretty bad. ”
I wonder how Mike the Nordic analyst sees the next months in Iceland, Europe and the USA, a year ago you said icelands economy had sunk without a trace and UK and USA were slowly heading towards recovery, i dont see that recovery, all i see is more problems mounting up.
“What about a functioning monetary system? Well, the best recent example of how to live without banks and money was Ireland in 1978. There was a bank strike which lasted many months. The first effect of the strike was that money disappeared – people hoarded it thinking that the world couldn’t function without it. How did people pay? Well, they used cheques.”
Not, cheques but perhaps a new currency to replace the Krona…..the Makrill.
Iceland has been building up a huge reserve of central currency – much to the chagrin of UK Ireland, and even Norway.
http://www.icenews.is/index.php/2010/08/24/eu-sanctions-against-iceland-over-mackerel-dispute/
http://www.bbc.co.uk/news/uk-scotland-north-east-orkney-shetland-11038358
The model for this currency already thrives.
http://online.wsj.com/article/NA_WSJ_PUB:SB122290720439096481.html
Of course details such as exchange rates – Makrill , Cod, Haddock, etc would need to be addressed.
Axel on October 15th 2009 I wrote the following:
“The US and UK economies are ships which were badly holed. They took on an enormous amount of water. But the leaks have been stopped and the pumps are working (slowly). The ships are moving very slowly, and certainly if a storm were to brew up there might be some dangerous moments ahead. The Icelandic economy? It has sunk without trace. The population are currently in lifeboats. The IMF is busy building them a new ship (much smaller than their old one) and coming to their rescue. For some strange reason the population is rowing away from its rescuers!”
I stand by that analysis of the comparative positions of the Icelandic, US and UK economies. The latter two certainly face “dangerous moments ahead”. I didn’t mention the word “recovery” in that posting and I don’t believe I have used it with relation to the UK or US (although I stand to be corrected if anyone has the patience to trawl through my posts).
What might the storm be? Three distinct possibilities. First, deflation. Secondly, if investors lose their appetite for US Federal bonds. Thirdly, a badly handled QE exercise by the US.
But this blog is about Iceland and the words I wrote last October still stand. What amazes me more than anything is that the Icelandic people and politicians (of all parties) haven’t done anything constructive themselves to fix the economic system. One could understand (and dislike) the arrogance of the population during the boom but I find it bemusing and distateful to see the “slagging off” of the IMF which continues. I met a member of the IMF team in Reykjavik some months back and he too was bemused by the reactions of the population. Most of their foreign exchange now comes thnks to the IMF yet they complain about the FX restrictions and limitation. The fuel they put in their cars is there thanks to the IMF. The medicines in the hospitals are purchased through the backing of the IMF. Yet still they complain about the organisation. To use his own words: “They just don’t get it.”
PS Elsewhere someone has stated that Iceland has greater FX reserves (comparatively I guess) than the US or UK. Well, just remember that ALL Iceland’s FX reserves have been purchased using loans from the IMF and some bilateral arrangements. Iceland doesn’t _really_ have any organic internal FX reserves at all.
Bjarni:
“This clause is rather contradictory, as while the Directive makes it clear that the funding of the deposit guarantee schemes MUST be borne by the credit institutions themselves, the Directive at the same time requires MUST NOT jeopardize the stability of the banking system.”
Yet the Icelandic government didn’t just jeopardize its stability, it *destroyed* the banking system by allowing it to get too big. You choose to focus on one aspect and use it to defend and justify your governments past and previous actions. However, they failed to develop a stable banking system, becuase they were being bribed, so they now have the liability for the result.
The banks got too big; Icelands fault.
The banks were not supervised and were acting in a criminal manner; Iceland’s fault.
The banks didn’t have a sufficient funds in the depositor protection scheme; Iceland’s fault.
The banks didn’t have access to sufficient funds from the lender of last resort; Iceland’s fault.
The banks failed and took each other down because they were incestuously related; Iceland’s fault.
Its simply, Iceland shouldn’t have allowed the banks to get so big that they threatened the financial system, ‘too big’ is the cause of the problem not the excuse.
To Peter – London/Krakow:
Finally we agree on something! :-)
On the specific points you mention:
- The banks got too big; Icelands fault.
I totally agree, the Icelandic government should have stepped in and never allowed the banking system to grow as much as it did.
- The banks were not supervised and were acting in a criminal manner; Iceland’s fault.
I definitely agree on the first part. Lot of people in Iceland are on the opinion that there was criminality involved regarding how the banks were run, but we are going to have to wait and see what happens, as any criminality is going to have to be proven first in court (until then its just an opinion).
- The banks didn’t have a sufficient funds in the depositor protection scheme; Iceland’s fault.
NO COUNTRY would have sufficient funds in their depositor protection scheme, if they are required to pay all their depositors after a complete crash of their respective banking system. Under a fractional reserve banking system, there simply is never enough cash available to pay everyone out.
If you think this is wrong, please prove it, by pointing to any country that has access to enough cash to pay out ALL their depositors. Please provide the total amount of deposits, total amount that is guaranteed, and total amount in the respective country guarantee fund.
- The banks didn’t have access to sufficient funds from the lender of last resort; Iceland’s fault.
Agree here also. Iceland had ample opportunity in the months and years before the crash to increase their reserves, but chose not to do so. In the reports that have been published, the Central Bank Chair David Oddson was the main opponent against increasing the reserves.
- The banks failed and took each other down because they were incestuously related; Iceland’s fault.
There were many reasons behind why the banks failed. Financial relationships between the banks, by cross-ownership and cross-lending was definitely one of them. But its a stretch to say that during the first week of October 2008, that this was the main reason they took each other down.
Governments played also a MAJOR role in taking down the Icelandic banks. The Icelandic government regarding Glitnir (the ill-fated takeover Sept 29th), and the UK government regarding Landsbanki (freezing order Oct 8th) and Kaupthing (handover of KSF to ING Oct 8th).
“It is simply not understandable why a third party is being caught responsible for the second who went gambling with assets of the first.”
Well, icelanders democratically elected the politicians they wanted to govern the country. The same politicians telling to the icelandic nation: “We are the richest nation in the world”. Icelanders believed it, and they also took a great part in purchasing many stuff that was way over their ability to pay. That is why many many people is bankrupt in Iceland today. Because they cannot simply pay. So, welcome to reality icelanders. Most of the icelandic population are just red necks workers, 60% of the active workers don’t even have a secondary education degree, they just went working right away after finishing primary school. The oligarchy formed by the politicians in charge, the banks and businessmen, made a very large profit of all this madness, and again, now icelanders have to pay for it. They are ALL responsible, the icelanders for behaving like that, the politicians for betraying its own people and the banks, because they were permitted to go too far with everything.
I think icelanders should learn the lesson. But the incredible is that, at the end of the day they wont, because the country is and will always be controlled by the same families. Icelandic democracy could be much better, but I think it is just a theatre right now. Ignorance have taken this country where it is. And the icelandic society as a whole is responsible for permitting it.
Because they liked to celebrate they were the richest people in the world. In the news always telling “we have bought this business abroad, Iceland is doing so well… etc.. etc… and a punch of lies, then fishery workers getting on the line at the bank to get 100% easy-to-get loans, they went crazy, many people bought nice cars, expensive homes, and travelled abroad on their consuming raids to the international shopping malls… And the króna was strong, but it was all AN ILLUSION. Maintained with risky business supported by EU workers’ savings.
Now, what is left is ruin, because Iceland was just borrowing money from other countries. But you can’t keep borrowing and borrowing and live a wealthy live, because at the end, somehow, you will be required to pay.
And the icesave stuff has an easy explanation. Bankers new the krona would fall, and that people would have to pay 2 times more the money they borrowed. So yes, banks are getting from people the money that was loaned to them, and that money needs to go back to the hands of the people who borrowed it to icelandic banks. Mostly UK, German and Dutch workers.
It is all a chain, everyone played their role. THE RICHEST NATION IN THE WORLD, WE ARE SO RICH!!! I heard that so so many times from the mouth of extravagant icelandic workers without education, driving their expensive cars, wearing their nice clothes and behaving like millionaires!! HAHAHAHA :-)
What a shame, so much ignorance… Now I see them driving their expensive cars, some people took loans for 8 millions, now they have 14 or 15 millions left to pay, but they keep driving.. postponing their payments as long as possible… What a sad thing to see… I mean their faces… They seem like if they had seen a ghost or something
WOW! when you go to the politics section in icenews, the only option is EUROPEAN UNION, that is what icelandic politics is about….
And I agree, the EU might be the only option to think about…
Bjarni
“Governments played also a MAJOR role in taking down the Icelandic banks. The Icelandic government regarding Glitnir (the ill-fated takeover Sept 29th), and the UK government regarding Landsbanki (freezing order Oct 8th) and Kaupthing (handover of KSF to ING Oct 8th).”
Please don’t come out with that old codswallop. All the banks were taken over by the Icelandic government on the 6th of October, Landsbanki was put into receivership on the 7th of October (BEFORE the freezing order). There was a run of cash withdrawals on Iceland before any of this happened. The court case in the UK made it clear the Icelandic banks were doomed weeks, months before they actually crashed. The moment Giltner was taken over Iceland was announced to be doomed in British newspapers.
Bjarni,
I have a great deal of respect for your views and in large part agree with the tone of what you say, but I do have to take sides with Peter on the issue of the UK government’s role in “taking down” any/all of the Icelandic banks. The UK government merely stepped in at the very end to establish an orderly unwinding of an enormous mess. Given the circumstances at the time, and the lack of time, their actions were just about as good as could be. Messy, not optimal, and some people did suffer, but the UK government was in no way the cause of the collapse of the three banks. Read the internal report by the Finnish guy (name escapes me).
“It is simply not understandable why a third party is being caught responsible for the second who went gambling with assets of the first.”
Let’s take it with the words of Karl Marx: The division of people is not between left and right, but between top and down.
There is no difference between a worker in the UK who paid for Icesave and others who did it in Iceland, this is a simple fact. I am German living in Iceland, but fell into the same trap as many of us did.
True we learned a lesson, but the hard way.
You see Iceland is a small island in the North Atlantic and naturally people like to get attention. Personally I like the boasting of the volcanoes here more than boasting of richness while billions suffer from hunger…
In the animal kingdom the perhaps most powerful creatures are the ants, however they have one enemy they are completely vulnerable to. It is a spider that disguises himself as an ant, but secretly eats ants for breakfast, lunch and dinner, without being bothered.
The same can be said about our democratic system. It is the perhaps most influential system but it is vulnerable to a monetary system that eats up those who are feeding it.
While in nature this serves to keep a balance in the eco system, in human society investment bankers harass in extreme cases the life long savings of hard working people.
The spider net in our society is abstract value that exceeds by far the real value of goods. To give you one example: Many people today go shopping with credit cards. While the money seemingly rests in the bank, it is actually somewhere out being used for business. Time is the ideal tool for those crooks to make use of our assets. We have no idea what they do with it. The best would be to use real money, not debit cards etc. Money notes already are printed abstract values; still they are closer to the real value.
Subsequently bankers have invented complicated practices which politicians today still do not understand and the banks take delight in not giving loans to companies who need investments, by justifying it, saying it is too risky…
Money that they took from the very same people before who saved them from the disaster they created in their money gambling.
Whatever it is, the real problem is that NO ONE in the entire world would TRUST icelandic banks nor the Icelandic government IN A LOOOOOOOOONG TIME…
Loosing credibility is the worst thing that can happen to a country. It is like someone who goes and borrows money, then he does not want to pay back and he even tells you that he did not borrow any money from you and he does not owe you anything.
With such a behavior… good luck Iceland!! You will be able to survive by selling some fish and making tourists beds ready. But the cash you saw in the last decades?? YOU WONT SEE THAT AGAIN…
THE RICHEST COUNTRY IN THE WORLD… HAHAHA ;-D
Gus at least now you are not posting in ALL CAPS. That is welcome thing.
>” Icelanders believed it, and they also took a great part in purchasing many stuff that was way over their ability to pay. That is why many many people is bankrupt in Iceland today. ”
What is not understood by many — and not you for sure — is that before the privatization of the banks starting 2003 or so, the old system of political appointee managed banking in Iceland did make it difficult for anyone to get loans so when Icelander had chance ( to take loans based on the banks risk scoring of them ) at the high interest rates then many Icelander did take the chance.
> “And the króna was strong, but it was all AN ILLUSION. Maintained with risky business supported by EU workers’ savings. ”
No, the Krona was ” strong ” during period 2005 – 2008 because of the carry trade hot money which kickstarted by side effect from all the monies coming in from the construction of the new alunimum plant at Fjardaál and hydro dams feeding the power station Kárahnjúkar
This did start inflation causing Central Bank to hike the interest rates of ISK when rest of world was cutting theirs or in case of Japan central bank almost paying people to take loan in they money.
Interest rates Iceland went down from 2002 to 2004 then was up again in 2005 and kept on going because of Central Bank trying to target the inflation with that tool.
During this time you could at one point do get profit of 13.75% based on borrowing in Yen and investing in Iceland krona base bonds and the like !! That is how cheap the Yen was, and that time how high Icelandic interest rate did hike.
As Mike UK NOrdic analyst no doubts an tell you foreign bond issuing did start happening big way September of 2005 on wards because this arbitrage opportunity was there for the hot money.
Icleandic banks did borrow they money from foreiign wholesale markets in majority of money in a different way based on they credit ratings ( in same way as like UK banks Norterhn Rock and Bradford and Bingleys did. IceSave and Kaupthing Edge much later were final things that did happen.
>” But you can’t keep borrowing and borrowing and live a wealthy live, because at the end, somehow, you will be required to pay. ”
This is lesson that Icelander have taken to heart. As said by Mike UK NOrdic analyst we must earn foreign currency. Not borrow it.
But without the new aluminium plant of Alcoa Fjardaál+ and the old one 50% own by Alcoa near Reykjavík we would really have been in much deeper trouble during October 2008 to now.
( Aluminium was biggest export during 2009 and earner for country fairly closely followed by fish of course. It wont be that way forever though as we do diversify more thanks to Data Centers and Internet selling of many individuals their services and manufactered goods plus also coming oil and gas tax income from Dreki . )
+ You can see this amazing big engineering project features in National Geographic Megasteuctures series ” Rock Eaters of Iceland “
“No, the Krona was ” strong ” during period 2005 – 2008 because of the carry trade hot money which kickstarted by side effect from all the monies coming in from the construction of the new alunimum plant at Fjardaál and hydro dams feeding the power station Kárahnjúkar”
No, this is not the HISTORY!!! Borrowing outside and, high interest rates inside!
“This did start inflation causing Central Bank to hike the interest rates of ISK when rest of world was cutting theirs or in case of Japan central bank almost paying people to take loan in they money.”
No, this is not the HISTORY. Rest of world rose interest rates, too.
When rest of world was cutting rates -recession-, Iceland rose rates again to fight exchange rate, and inflation; banking and currency crisis: krona dropped and, inflation!
January 1st 2003:
Policy rate: 5,80% / EU 2,75% / ratio 2,11 / +3,05%
ICE Inflation: 1,4%
January 1st 2004:
Policy rate: 5,30% / EU 2% / ratio 2,65 / +3,30%
ICE Inflation: 2,4%
January 1st 2005:
Policy rate: 8,25% / EU 2% / ratio 4,12 / +6,25%
ICE Inflation: 4%
January 1st 2006:
Policy rate: 10,50% / EU 2,25% / ratio 4,67 / +8,25%
ICE Inflation: 4,4%
January 1st 2007:
Policy rate: 14,25% / EU 3,50% / ratio 4,07 / +10,75%
ICE Inflation: 6,9%
January 1st 2008:
Policy rate: 13,75% / EU 4% / ratio 3,44 / +9,75%
ICE Inflation: 5,8%
October 1st 2008:
Policy rate: 15,50% / EU 4,25% / ratio 3,65 / +11,25
ICE Inflation: 14%
TRICK: +3,05% ; +3,30% ; +6,25% ; +8,25% ; +10,75% ; +9,75 ; +11,25% !!!!
TRICK (rate-inflation): +4,40% ; +2,90% ; +4,25% ; +6,10% ; +7,35% ; +7,95% ; +1,50% (october 2008, crisis).
Only an arrogant and stupid guy throws more petrol to the fire: Oddsson, a villager!
It only was a old trick on the lapsing!!! And bye bye Iceland: bye bye borrowing, bye bye krona, bye bye banking, bye bye party!
An illusion!
Fisy
“But without the new aluminium plant of Alcoa Fjardaál+ and the old one 50% own by Alcoa near Reykjavík we would really have been in much deeper trouble during October 2008 to now.”
I believe the Krona should be fixed to aluminium, along the way the British Pound was linked to Sterling silver and the US dollar to Gold. The Dollar is linked to oil now.
Politicians would hate it of course, printing paper is cheaper than making aluminium but it would make the Krona a hard currency.
JJ did write :
>” No, this is not the HISTORY!!! Borrowing outside and, high interest rates inside! ”
i do think that you did not bother to read my post which was a response to Sir Euro ( Gus )’s un factual accussings.
I find your post strange because you are repeating exactly the facts I was pointing out. But then saying that is not the history. We dont each have our own facts.
There is one set of them so so clearly agree with what I am saying. You do not bother mention any thing about the WHY.
Interest rates Iceland went down from 2002 to 2004 then was up again in 2005 and kept on going because of Central Bank trying to target the inflation with that tool ( because of inflation caused by monies coming in from the construction of the new alunimum plant Alcoa Fjardaál at Reyðarfjörður and hydro dams feeding the power station Kárahnjúkar ).
That is what did kick start this all.
All this money coming in for that contrsuction between 2004 and 2007 did set inflation right on its way.
By September 2005 the foreign issuers of bonds had got hold of idea and the “Glacier Bonds ” began in earnest leading to more interest from investors around world not just the simple carry trade arbitragers.
( You can find good docum on this from the under rated Max Keiser, ” Money Geyser ” from 2007 :
http://www.youtube.com/watch?v=JjglR2KYz5o )
If I am getting mixed up would some one that knows like UK Mike Nordic analyst please correct.
“>I believe the Krona should be fixed to aluminium, along the way the British Pound was linked to Sterling silver and the US dollar to Gold. The Dollar is linked to oil now. ”
Oil and gas from Dreki will give defacto backing via tax receipts in the coming years, just a matter of time.
Why should Icelanders be liable for the international acts of criminals who controlled institutions that are merely chartered in Iceland? From all I have heard the conduct that gave rise to losses occurred outside of Iceland. Foreigners should have been aware of doing business this way; foreigners should not be allowed to blame Icelanders for their banking losses unless Iceland provided an explicit guarantee for the safety of the chartered institution.
>Why should Icelanders be liable for the international acts of criminals who controlled institutions that are merely chartered in Iceland?
Because the entity responsible for regulatating them was also in Iceland. And because the rules that allowed them to operate within the EU required state backing. Or, at least, so the argument goes.
Only way we’ll ever know for certain is if it goes, as Fisy says, “To court!”. But it’s worth noting that Iceland is, AFAIK, the only country within the EU to take the official position that the state guarantee was not required.
FISHY ( that’s a name that suits you better)
Aluminum production didn’t, don’t and wont make Iceland a rich country. period. So the richness we saw was nothing but a banking circus were foreign capital was attracted to icelandic banks and investments. Investors realized that this country was a bay of corrupted pirates and governed by a bank mafia and incompetent politicians, they just ran out with the money out of the country. That is why you had to put restrictions and take the IMF loan. Because if not iceland would be today one of the poorest countries in the world, just in the line of south american banana republics that no matter what and how much they produce, they cannot get out of the hole. And iceland wont, at least in a very long time.
Icelanders have shown the whole world they only can do very well three things: The first is lying, the second is stealing and the third is denying all responsibility.
For the most, aluminum production is going well so far just because it is under the direct supervision of a FOREIGN COMPANY. ALCOA. The only icelandic thing there are the workers burning their hands for one of the lowest salaries in Europe, and the cheap energy they are getting almost for free.
THAT IS BAD BAD MANAGING OF HUMAN AND NATURAL RESOURCES. Still, people like you FISHY would just be so proud of this aluminum production. Well, most of the money is not staying in iceland as buyers buy Alcoa, an international company, and pay Alcoa ABROAD IN FOREIGN CURRENCY. So the only money leaking to Iceland is that for keeping you working your *ss off for a misery of salary and selling your energy so cheap.
My most honest congratulation to Icelandic politicians for their management.
Then, apart of the aluminum, what is left? FISH. And fish can give good money, to the ship owners and some lucky fishermen. But it cant produce such richness to put Iceland at the economic level of any EU country. Sad but true.
The worst is not that we have a country, Iceland, depending mostly on the production oF aluminum ( that does not belong to them but to ALCOA) and fishing. I mean, primary sector of production like in most of the UNDEVELOPED and POOR nations. The worst is that added to that ICELAND IS BANKRUPT AND IT HAS A HUGE DEBT.
You see fishy those volvos, mercedes and nice cars? that many icelanders drive even when the loans they have to pay for them let their refrigerators empty? Well, say good bye to them because that is just what is left of the ILLUSION and the CIRCUS icelanders have lived in during the last decade, dancing like clowns.
Now what is left is a romantic and full of shame remembering of what iceland seemed to be but never was. And still, you are blind, Iceland is blind. It seems that the country, nor its people, do really want to accept that this is a poor nation now. PLEASE JUST GET IT SOMEDAY. YOU LIVED WAY OVER YOUR POSSIBILITIES!! STOP BLAMING SOMEONE ELSE OF YOUR STUPIDITY, YOUR LACK OF ORGANIZATION, YOUR LACK OF RESPONSIBILITY, YOUR INCOMPETENT POLITICIANS AND THE WHOLE MAFIA THAT HAS BEEN RULING THIS COUNTRY FOR SUCH A LONG TIME. start accepting the truth and getting in charge of the situation, that is the only hope for Iceland.
Iceland has gone cap in hand, knocking at the doors of all countries, and no one wanted to trust iceland anymore. Your neighbors from the Faroe, they send some coins because they felt sorry for the irresponsible cousin. The IMF was the only and last resource for iceland. AND IN JUST ONE YEAR ICELAND WENT FROM CLAIMING TO BE THE RICHEST COUNTRY IN THE WORLD TO WAIT IN LINE AT THE IMF WITH THE OTHER POOR COUNTRIES.
I know that my posts hurt. They hurt because I am telling the truth, the inconvenient truth. But icelanders need to wake up and look at things as the are, without avoiding it. The sooner the better!!
Iceland needs deep and radical changes: socially, economically and politically. A compromise of respect for the country and its people. The end of the feudal-like system of mafia-family linked political structure. The recovering of the natural resources, the laws, and specially: the notion icelanders have of themselves and the rest of the world. Put your feet on the floor and try to be just normal people, more responsible, more honest and more MODEST.
“Interest rates Iceland went down from 2002 to 2004 then was up again in 2005 and kept on going because of Central Bank trying to target the inflation with that tool ( because of inflation caused by monies coming in from the construction of the new alunimum plant Alcoa Fjardaál at Reyðarfjörður and hydro dams feeding the power station Kárahnjúkar ). That is what did kick start this all. All this money coming in for that contrsuction between 2004 and 2007 did set inflation right on its way.”
jajaja incredible! Again, this is not the HISTORY.
Central Bank trying to target the inflation with that tool -interest rate- is the official version!!
How would the Central Bank target the inflation if the Government/ICB makes FLEXIBLE the Economy, deregulates the finance and banking, suggests and urges to request loans outside and, continuously, cuts taxes? Government/Central Bank -same thing- could not target inflation!
How to pay? Bonds and appreciating exchange rate! Today, Krona is dead, and lots of Debts!
Bankrupted.
“Why should Icelanders be liable for the international acts of criminals who controlled institutions that are merely chartered in Iceland?”
All the icelandic banks were 100% Icelandic owned,managed and staffed. Even overseas branches had Icelandic staff. As bromley86 points out they were also regulated, guaruaranteed and promoted by the Icelandic government
“Oil and gas from Dreki will give defacto backing via tax receipts in the coming years, just a matter of time”
That time being 50 years to eternity.
It will take a decade for Dreki to come online AFTER Norwegians spend billions of Euro’s developing links to the nearest island. The Norwegians have said they won’t do that for a very,very long time if ever.
What do you think will be the attitude towards tradition oil in ten or twenty years? When battery technology would have advanced to replace the internal combustion engine, when Biodiesel from sea based farms is in full production? Draki will never happen and it has no releation to the worthless icelandic currency today or tommorrow.
JJ writes
“Central Bank trying to target the inflation with that tool -interest rate- is the official version!!
How would the Central Bank target the inflation if the Government/ICB makes FLEXIBLE the Economy, deregulates the finance and banking, suggests and urges to request loans outside and, continuously, cuts taxes? Government/Central Bank -same thing- could not target inflation!”
Yes, this was well known at the time. The economists’ way of expressing this at the time was:
1) “monetary policy in Iceland is imperfectly transmitted into the real economy”
and
2) “monetary policy and fiscal policy in Iceland are working against each other”
I don’t like D Oddsson BUT during his time at the Central Bank the interest rate policy was quite correct. The Central Bank and the government were not the same thing – I saw them operating indepedently. High interest rates are the classic way to mop up excess liquidity in an economy. The problem was that the government kept giving money away through tax reductions and the banks made things even worse by accessing international money market funds and then routing the money into the hands of Icelanders (who were very keen to take it!). A further complicating factor was (and still is) the way the Housing Finance Fund operates. It was issuing low interest loans – again undercutting the Central Bank – with the inflation-component factored in so that it would only effect behaviour 3 to 10 years down the line. This last factor was further complicated by the three banks entering the mortgage market and using their access to low interest funds to compete against the HFF. They were also trying to build market share in the country which was a further incentive to keep rates low. (Again many external observers commented that the HFF had ceased to be a “social fund” to encourage home ownership and became a way of pumping up the housing market artificially. This weakness still hasn’t been addressed.)
The analogy of the fire was used a great deal at the time (I recall doing it myself – even I am prone to cliches now and again). The economy was going up in flames, and the Central Bank was trying to put it out, but the government, HFF and the banks were throwing petrol onto it.
Oddsson did make a huge blunder when he stated that the Bank would not reduce the high interest rates since to do so would cause a depreciation of the ISK with subsequent inflation. I think that was January 2007. From that moment onwards the Central Bank was riding a tiger – they couldn’t get off because they would be eaten alive. As far as the carry-traders were concerned they were playing chicken. Could they time their exit before the inevitable crash?
Mike UK did write :
> ” I have been back in Iceland on a number of occasions this year and the state of the country is pretty bad. Ordinary folk are bridling about the currency restrictions, shelves in Hagkaup are empty, the quality of the food on offer is very poor, everything is expensive for the locals, jobs have been lost, pay cuts implemented, etc etc. ”
Most ordinary folk are annoyed at the way the EU application has been handled without the referendum to start talks, are amused by Jón Gnarr ( who is not doing bad job at all ).
Currency controls are having usual effect. But far more bridling is how the toll house is getting a new interest in opening a lot of their parcels coming in for n o good reasons.
I do wonder where you saw this ” empty shelves “. The same variety of goods is on sale.
Yes some brands are gone ( particualry US imports ) but we are talking about the different between no longer getting Celestial Seasonings teas of some types and having to buy Twinings instead.
Yes the price inreases we have had since late 2008 are catching up finally with many people but more because of the income tax bracket added in name of equality by Red-Green governemtn. No longer the carefully calibrated flat tax that we had before.
They do take more in tax and has began to bite more and more this year in the pockets of every one when prices are not clearly going down for basic goods, and its been done in arbitrary way not thinking of how it will effect people.
In the name of equality ! It could have been done in different way.
> ” What amazes me more than anything is that the Icelandic people and politicians (of all parties) haven’t done anything constructive themselves to fix the economic system. ”
It is unfortunate but we will see this current Social Democrat and LeftGreen coalition for some months yet and they just do care about preparing for EU member ship that will never come.
The obssession of equality of theirs also is to have the effect of keeping every one equally poor and this nonsense in the tax system of dividends they did pass for companies last minute of 2009 just sets the clock backwards.
Yes they do have problems of meeting budgets. But they do not seem interst in cuts of the public sector fat jobs, more in chanign the tax system to level every one income down.
FISHY, I do not understand why you blindly defend the Party that governed Iceland for decades and brought the country were it is now. A party that promoted a corrupted bank system, a do-what-you-want laws, the family connections of power, and FOOLED a whole country with the arrogant ideas that you were the richest people in the world…
The icelandic ruin is a history of arrogance, ignorance and shame worth to be told to my grandchildren…
What does anyone make of this?
http://www.grapevine.is/News/ReadArticle/New-Icesave-Offer-Could-Cost-Iceland-Much-Less
Checked out the source, but it didn’t seem to say any more. Perhaps the PDF link in the article below does, but I didn’t try to translate that.
http://www.vb.is/frett/1/61357/
My reading is that the deal is the same as the last one, but with Iceland using some of it’s reserves to pay off a chunk immediately, lowering the interest burden. Is that not just the same deal rebadged then, as presumably Iceland can choose to pay the loan off at any time if it secures better financing elsewhere?
Sounds like bull****.
This confirms they are talking, but from my understanding (although its confusing) they are discussing repayment of the full amount plus interest.
“As for the concessions he indicates that the basis of the discussions is that “we have declared the entire principal and a reasonable remuneration to receive.”
http://www.nu.nl/economie/2335123/ijsland-moet-met-nieuw-voorstel-icesave-schulden-komen-.html
Mike (UK Nordic analyst) says:
“Again many external observers commented that the HFF had ceased to be a “social fund” to encourage home ownership and became a way of pumping up the housing market artificially. This weakness still hasn’t been addressed.”
——————————————
Well those external observers would be greatly misinformed, the pumping up of the housing market was not as a result of the HFF mortgage lending.
The comments of the external observers is not supported by statistics.
The HFF had been in existence for 10? years before the house prices began to rise inexoribly in late 2003. The HFF criteria for granting a loan to individuals for property purchase and/or for house renovation were more strict than the commercial banks. The rise in house prices in 2003 coincided with other factors of ultimately destructive unregulated economic policies which were carried out with reckless abandon by the commercial banks – beginning 2003.
Knowless writes:
“the pumping up of the housing market was not as a result of the HFF mortgage lending.”
The Kaarlo Jannari report on Icelandic banking system states (and I quote):
“At the same time, the HFF started to relax conditions in the mortgage market in order to increase its market share, and the banks joined in to compete aggressively in this rapidly growing market. In many cases, loan-to-value ratios neared 100%, and because real estate
prices rose at unprecedented rates, households used the opportunity to raise money by using their homes as collateral to fund their consumption spree. This led to high household indebtedness.”
and he concludes that
“the problem of indexation must be tackled, as well as the role of the HFF.”
And if you access the HFF reports (http://www.ils.is/index.aspx?GroupId=281&TabId=285) you can see that the average size of loan in the relevant period (2003 – 6) increased signficantly, and the LTV ratio hit 90%.
But I guess we must all bow down to your superior, and secret, knowledge that the HFF did NOT contribute to the house price boom. Clearly the HFF accounts don’t tell the whole story, and poor old deluded Mr Jannari clearly has no access your secret sources of information – or would you care to reference them for us?