tag:blogger.com,1999:blog-970611666708740586.post5101014061131043525..comments2023-08-28T11:48:39.554-07:00Comments on Reserved Place: On thin iceRebelEconomisthttp://www.blogger.com/profile/13241098878248190971noreply@blogger.comBlogger37125tag:blogger.com,1999:blog-970611666708740586.post-46223455485532756762014-02-10T16:46:47.228-08:002014-02-10T16:46:47.228-08:00Load of crap.
There is a common assumption in som...Load of crap.<br /><br />There is a common assumption in some circles in London City that the Government of Westminster will bail them out.<br /><br />But that is a rare exception not extending far beyond the City and perhaps only heard of in Westminster government quarters.<br /><br />Else where in the wide world banking is a private enterprise conducted by businessmen - not civil servants of the socialist state.<br /><br />Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-970611666708740586.post-28403586574874852042010-06-01T03:53:01.438-07:002010-06-01T03:53:01.438-07:00Thanks for your informative comment with its usefu...Thanks for your informative comment with its useful link, halldor. I am gratified to see that the EFTA Surveillance Authority finds that EEA law supports what I consider to be the moral obligation on the (State of) Iceland to meet the cost of the minimum compensation paid to British and Dutch Icesave depositors. I was also interested to note in April the publication of the Icelandic Special Investigation Commission (SIC) report into the collapse of the Icelandic banks ( http://sic.althingi.is/ ), which (judging by the English translation) described the flaws in Iceland's business culture and financial supervision that contributed to the debacle, and revealed more about the difficulties that the Icelandic banks' UK and Netherlands operations posed for the British and Dutch supervisory authorities. The objectivity of the SIC report is a credit to Iceland's present authorities, and goes some way to restoring the reputation for trustworthiness and reliability that Iceland once had in the UK, and which Icesave exploited (Ch 18, page 5 of the SIC report).<br /><br />Whether Iceland has the means or will to pay the British and Dutch is another question, but I suppose that failure to pay a legally valid liability would constitute default.RebelEconomisthttps://www.blogger.com/profile/13241098878248190971noreply@blogger.comtag:blogger.com,1999:blog-970611666708740586.post-55691069643844074542010-05-27T17:20:15.027-07:002010-05-27T17:20:15.027-07:00An interesting twist in this semi dormant saga.
T...An interesting twist in this semi dormant saga.<br /><br />The EFTA Surveillance Authority (ESA) recently (May 26th) made public a letter of formal notice sent to the Icelandic Authorities (see <br />http://www.eftasurv.int/media/internal-market/LFN-Icesave.pdf )<br /><br />The letter basically states that Iceland is obliged to pay, and it rebuts in some detail the Icelandic position that:<br /> a) there is no state backing for a fund since setting up a guarantee scheme is enough to fulfill obligations under the Directive, <br />and<br />b) the Directive does not apply when deposits are unavailable due to a major and general banking crisis. <br /><br />With regards to point a) ESA effectively says that a fund that is not properly financed cannot be regarded as having met the directive requirements: <br /><br />"If the obligation outlined above has not been achieved or cannot be achieved by the schemes established pursuant to the Directive, depositors are not compensated or protected by it. Consequently, the exoneration of liability does not come into play."<br /><br />With regards to the second point, they review court rulings and conclude that " Consequently, exceptional circumstances do not release the Icelandic Government from its responsibility".<br /><br />Furthermore, they raise the discrimination issue, and find that "the Icelandic authorities cannot advance any viable justification for the discriminatory measures taken against the foreign deposits in the circumstances of this case"<br /><br />Interesting, enough the ESA letter which as a "letter of formal notice is the first stage in infringement proceedings" could lead to the issue ending up in the Court of Justice.<br /><br />And as usual both sides claim victory. Those that want to take the issue to court, ignore the fact that the ruling goes completely against them and happily assert that the ruling supports the Icelandic contention that this should go to court.<br /><br />And the Dutch simply say that the ESA letter agrees with their position that Iceland is obliged to pay.<br /><br />Meanwhile negotiations are moving at a snails pace...halldorhttps://www.blogger.com/profile/16870019953632820062noreply@blogger.comtag:blogger.com,1999:blog-970611666708740586.post-60597868612650690812010-03-14T19:54:41.020-07:002010-03-14T19:54:41.020-07:00RebelEconomist-
I think the Icelandic diaspora co...RebelEconomist-<br /><br />I think the Icelandic diaspora could possibly help with the repayment--but first there has to be a deal. I for one will help both through remittances and through attempts to bring business to Iceland. But the diaspora of the past 50-100 years is also not large as Iceland has not had as much brain-drain as many smaller countries; and the great migrations to the US in the 1800 may not have sufficiently direct linkage to Iceland by now.<br /><br />A bigger way the diaspora could help would be through participation in much needed constitutional reform that might break up dysfunctional power struggles. However, there appears to be little interest in this participation on behalf of people living in Iceland, and often regarded as meddling.<br /><br />On your second point, of increased population. It actually flows the other way. Most of Iceland's foreign currency income is created by a very small proportion of the population, even when counting supporting industries. I'm not sure of the exact percentages, but upwards of 2/3s of all foreign currency is generated by fisheries and a few aluminum smelters. And Iceland is a Scandinavian welfare society with a large public sector. Consequently Iceland might actually benefit financially in the short term from the 'right kind' of depopulation. <br /><br />But despite my pessimism for a deal in the near term, I have not doubt that if Iceland got out of it's own way and finalized the Icesave agreements soon, it would survive this fine. My despondence stems from seeing that the windows of opportunity may be closing with no solution in sight.Andri Haraldssonhttp://www.blogger.comnoreply@blogger.comtag:blogger.com,1999:blog-970611666708740586.post-4170545575503782052010-03-14T14:21:57.358-07:002010-03-14T14:21:57.358-07:00RebelEconomist:
To the best of my knowledge, bond...RebelEconomist:<br /><br />To the best of my knowledge, bonds would have equal priority to deposits. <br /><br />There were other branches of Icelandic banks which held deposits. One example is Kaupthing Edge in Germany. It was a branch of the Icelandic Kaupthing. They were able to recover all deposits. But how? The reason is the Emergency Legislation. <br /><br />What happens if it is ruled unconstitutional? The claimants which are not depositors will have to be paid back according to the original legislation. How will that be implemented? <br /><br />I don't think non-insured British, Dutch or German depositors (like councils, counties, hospitals and charities) would be happy to pay back what they had recovered. <br /><br />This is the biggest risk facing Iceland right now, and one that will continue to exist for many years to come.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-970611666708740586.post-37962982260699874752010-03-14T00:47:01.061-08:002010-03-14T00:47:01.061-08:00Thanks for all your comments. I had not lost inte...Thanks for all your comments. I had not lost interest; it turned out that I had been optimistic to believe that my laptop problems were over.<br /><br />Bjorn on 10 March 2010 at 14.04:<br />Equitable Life, Bank of England lending? Bjorn, I get the impression that you are trying to dig up dirt to throw at Britain. In the case of BoE lending, I would expect details of both the loans and their collateral to be commercially confidential – if a bank's large exposures are known, the bank is liable to be quoted worse terms for unwinding them. This confidentiality is standard central banking practice; for the same reason, the Fed is resisting a Freedom of Information request to disclose details of its emergency lending activities. Given the security provided by the collateral, the BoE, and by implication the UK public sector, should be largely protected against credit loss, so I think Britain has bigger worries at the moment. I cannot defend our conduct in the crusades or the slave trade though!<br /><br />Anonymous on 10 March 2010 at 15.21 and 15.30:<br />It did strike me that the projected recovery rate for Landsbanki deposits was high – I was involved in some risk management work a few years ago that assumed a recovery rate for bank deposits of 50%. Do you know what the other Landsbanki liabilities are that would rise up the creditor hierarchy if deposits were not given priority? Bonds maybe? If rescinding priority for deposits would lower the recovery rate for deposits to 30%, there must be a lot of these other liabilities. I do agree that passing a law to fix the creditor hierarchy when it was known that the bank was about to fail has to be highly dubious.<br /><br />FF on 10 March 2010 at 16.46:<br />I was not aware of the existence of that document (ie the one on the Channel Four news website); thanks for the reference. I agree that, even though Britain and the Netherlands may feel that taking the matter to court effectively forces them to win the argument twice, if Iceland promises to abide by the ruling, it might be a chance worth taking to resolve the dispute.<br /><br />Bromley86<br />Even if Icelandic law does allow the deposit guarantee to be paid in ISK, since the TIF expresses (eg at the link given in the post) the guarantee in euros, I do not think that it would be fair to insist on paying in ISK, especially if the payment is fixed using a disadvantageous exchange rate. I dare say that a serious attempt to interpret the guarantee in such a creative way would scare many of Icelanders' potential business counterparties. Maybe Iceland could offer a choice of some proportion in ISK, which might be acceptable if Britain or the Netherlands are willing to hold some ISK for investment purposes, or some Icelandic asset, such as a site for a naval base or a scientific research station.<br /><br />Andri on 11 March 2010 at 07.57:<br />Your thoughtful if pessimistic comment brought to mind a couple of ways that Iceland could spread the burden of repaying the British and Dutch: seek contributions from the Icelandic diaspora, and encourage immigration to enlarge Iceland's population (not to mention its gene pool)!RebelEconomisthttps://www.blogger.com/profile/13241098878248190971noreply@blogger.comtag:blogger.com,1999:blog-970611666708740586.post-79968215039048828522010-03-11T07:57:25.799-08:002010-03-11T07:57:25.799-08:00I think FF hits on what I (implicitly I suppose) s...I think FF hits on what I (implicitly I suppose) see as the only thing that really matters at this point: how can this dispute be settled, given where it has landed. I have some insights here as an Icelander, although I have lived in the US for 20 years and thus am not in Iceland to gauge things first hand.<br /><br />My previous comments allude to the challenges. Iceland is very small and despite claiming to be the bastion of modern democracy has really never been very democratic. First it was governed by clans, then foreign kings and their local henchmen. Finally as happened with many freed former colonial countries, once Iceland gained independence it came to be ruled by a small elite that put itself in charge and siphoned off much of the wealth creation. The stunt the Icelandic president played with the referendum was really just tapping into the deep-seated resentment the average Icelander feels towards this Mandarin class after the collapse.<br /><br />As RebelEconomist pointed out, it is also difficult to maintain a very high level of sophistication in every branch of government/civic life, with only 300.000 people. One of the traits that characterizes Icelanders is that they are by-and-large, the self-reliant jack-of-all-trades types. Good thing too, since everyone seems to have multiple job functions. The downside to this, though, is lack of respect for true expertise. So it’s quite common to see even people in position of authority put on equal basis the ramblings of some TV talking-head who spent 5 minutes on Wikipedia reading up on things, and the measured and sophisticated analysis of someone who has spent a lifetime gaining insight into an issue.<br />Combine this with everyone being everyone’s second cousin, and you have a civil discourse that is neither. So all across the Icelandic blogosphere and newspapers, you can see that a very large share of the commentators are not trying to make sense of what is in Iceland's best interest, but rather they are caught in an emotional brawl, which very quickly descends into some mistaken notions of what constitutes national pride.<br /> <br />And this is only the first of the problems. On the political side, the president’s gambit has produced a major constitutional crisis that in effect leaves it wholly in doubt that the Icesave crises can be concluded without the direct involvement and acquiescence of a nominally powerless president who is trying to ride a wave of resentment in an effort to salvage his legacy. His involvement is necessitated as there it is practically inconceivable that any Icesave accord will be passed in a national referendum. (Note my comments about the resentment against the establishment above.)<br /><br />Indeed more than half of all people in Iceland feel they should not pay anything—and it’s in large part because they feel let down by all of their leaders. So the net result is that the parliament has to pass a new agreement AND it has to convince the president to sign it. Understanding this, the British/Dutch governments demanded any further negotiation would be done with all parties in parliament. This is understandable but unworkable. For this approach to work it relies on the good intentions of all parties. This seems naïve, as the two former ruling parties have no particular incentive to see any deal struck, as this would simply ensure the government they are not party to will serve another 3 years. Moreover, they are now maneuvering to be seen to be on ‘the side of the people’ in all of this.<br /><br />This is why I have little hope for a resolution. Churchill’s admonition “[the] United States invariably does the right thing, after having exhausted every other alternative” is probably applicable. The difference of course is that Iceland cannot afford this approach, and if it tries, it may not in the end afford to pay Icesave at all.Andri Haraldssonhttp://www.blogger.comnoreply@blogger.comtag:blogger.com,1999:blog-970611666708740586.post-50401797036764907542010-03-11T07:54:10.105-08:002010-03-11T07:54:10.105-08:00Anon:
"The directive states that deposits can...Anon:<br />"The directive states that deposits can be refunded in the currency of the home country, or in IKR."<br /><br />I don't think that this is the case.<br /><br />The Icelandic law does say that ISK can be used, but sets their convertability so that they're worth 20,887 euros:<br />"This amount shall be linked to the EUR exchange rate of 5 January 1999"<br />http://eng.idnadarraduneyti.is/laws-and-regulations/nr/1165<br /><br />I couldn't see any mention of local currencies in 94/19/EC. Just minimum 20,000 ECU.Bromley86noreply@blogger.comtag:blogger.com,1999:blog-970611666708740586.post-41339614343063513312010-03-11T00:07:45.052-08:002010-03-11T00:07:45.052-08:00Björn: It is the Supreme Court of Iceland.Björn: It is the Supreme Court of Iceland.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-970611666708740586.post-39819657691698879312010-03-10T16:47:18.439-08:002010-03-10T16:47:18.439-08:00Finally, should Britain and the Netherlands unilat...Finally, should Britain and the Netherlands unilaterally reduce the burden on Iceland because of shared responsibility or because these countries are bigger than Iceland? Up to now, we have discussed everything from an Icelandic perspective, but here we need to introduce a UK/Dutch angle – something I’m conscious of as a UK taxpayer. The responsibility question is dealt with by the legal situation, which is assumed to be that Iceland is responsible for the first €20 877 and UK/Netherlands for the rest.. Regulation for Icesave was the sole responsibility of the Icelandic authorities – there is no shared responsibility. In terms of scale, I don’t think the UK or the Netherlands should in the first instance take on the Icelandic burden because a) it’s Iceland’s responsibility, not ours (Heaven knows, we have plenty of our own bank messes to deal with, not least Kaupthing, Singer and Friedlander, the UK subsidiary of another Icelandic bank) b) if it’s not taken by Icelandic taxpayers, the burden falls on UK and Dutch taxpayers instead. Upto now and quite possibly in the future too, Icelanders have been wealthier than Britons and the Dutch. It would be inequitable for poorer taxpayers to take on a burden that formally belongs to people who are richer; c) we don’t know what the burden will be yet and how much will be refunded through Landsbanki assets. If at the end of all of this, the burden is genuinely unaffordable for Icelanders, we may need to think again. But the case has to be made with concrete figures.FFhttps://www.blogger.com/profile/16627719160178595437noreply@blogger.comtag:blogger.com,1999:blog-970611666708740586.post-16169557271563742272010-03-10T16:46:49.355-08:002010-03-10T16:46:49.355-08:00One difficulty that I have as an interested outsid...One difficulty that I have as an interested outsider is understanding what would unlock the deal for Icelanders. I assume most Icelanders want a deal, if only to move on from Icesave, renew credit and credibility and start rebuilding their economy. But what’s the deal-breaker that currently preventing this happening?<br /><br />Icelanders appear to have three main objections to the Icesave loan: 1) they have no legal obligation to compensate Icesave depositors in the UK and the Netherlands; 2) the interest rates are too high; 3) the debt is too big a burden for a small country, they never signed up for anything like this and it would be more reasonable for the larger countries to take it on instead.<br /><br />Although government officials and others mainly point to the interest rate as the issue, I suspect this isn’t the crux of the matter, because it would be pretty straightforward to sort out. With any pricing negotiations you haggle, sit down over the mint tea and come to a price that both parties can live with in the interest of getting a deal. So there looks to be a residual issue of legal obligation or affordability that’s holding Iceland back from agreeing the loan. In a sense they are similar: Icelanders are reluctant to do deal because they don’t see why they should.<br /><br />In principle, the legal issue is also easy to sort out: you go to an agreed court and get a judgment. In my previous comment I have explained one reason why I don’t think Iceland is actively pursuing this course in spite of complaints about British and Dutch reluctance to do the same. But there is another point to make. The Icelandic party requested a legal opinion at the start of the negotiations over the Icesave loan. The selected panel of experts came back with an assessment that emphatically asserted Iceland’s obligation to compensate Icesave depositors in full - www.channel4.com/news/media/2010/02/day25/icelandlegaladvice.pdf. Now, a panel experts isn’t the same as a court of law, but we have to accept a high probability that the competent court would come to the same conclusion. In this case, would Icelanders say, “Fair enough, that’s my issue dealt with. Let’s pay what’s due”? Or would they say it’s just an anti-Iceland plot?<br /><br />(For the absence of doubt, if the court decides that Iceland has no legal obligation, that’s the end of the matter as far as I am concerned. The British and the Dutch governments voluntarily compensated depositors in their countries and can try to claim as much as they can from residual Landsbanki assets – in this hypothetical case it has nothing to do with the Icelandic government).<br /><br />Which leads onto the final question. Does Iceland have a moral obligation to pay on the assumption that the treaty (Directive 94/19) says that they should or is the scale of the debt so large that it should be let off all or part of it? The important point to make here is that Iceland genuinely has a choice: no-one can force it to pay for the Icesave guarantees if it doesn’t want to. Equally, it should expect negative consequences if it chooses not to (and by the way don’t blame Britain and Holland over these consequences – they have relatively little leverage over whether other countries and organisations extend credit to Iceland). So Iceland would need to trade off the cost of fulfilling the legal obligation against the damage of not doing so. I suspect, as RebelEconomist indicates, that the cost is less but the damage is more than some Icelanders assume.FFhttps://www.blogger.com/profile/16627719160178595437noreply@blogger.comtag:blogger.com,1999:blog-970611666708740586.post-31588721477379003582010-03-10T15:58:46.039-08:002010-03-10T15:58:46.039-08:00Who can rule "emergency law" unlawful?Who can rule "emergency law" unlawful?Björn Jónassonhttps://www.blogger.com/profile/00441633841215181989noreply@blogger.comtag:blogger.com,1999:blog-970611666708740586.post-90981455799918796152010-03-10T15:30:54.409-08:002010-03-10T15:30:54.409-08:00An addition to my previous comment: Please note th...An addition to my previous comment: Please note the "Emergency Legislation" was passed <b>the night before</b> Landsbanki was taken over. Needless to say, changing the order of claim priority the night before bankruptcy is highly dubious and likely to be ruled unlawful.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-970611666708740586.post-60395170097140197852010-03-10T15:21:19.839-08:002010-03-10T15:21:19.839-08:00Thank you for a good analysis. There is one vital ...Thank you for a good analysis. There is one vital point missing though. The so called Emergency Legislation (nr. 125 7. October 2008) makes deposits have priority above all other claims. The winding up board of Landsbanki states that the recovery rate for <b>priority</b> claims will be 89%. The Emergency Legislation is being contested in courts and there will be years until courts will decide whether it does or does not go against the constitution. The Landsbanki winding up board has stated it will not pay into any of the IceSave claims until this has been resolved which is one of the reasons there will be no payments of the IceSave debt for several years. However, the main point is that if the court rules that this part of the Emergency Legislation is unconstitutional, the recovery rate will be much less. Eva Joly, which assists in the criminal investigations started in the wake of the collapse, has stated the recovery rate will be 30% if this happens. <br /><br />It will also have a much wider impact, since non-insured claimants (like counties, hospitals and others) are currently getting much more of their claims recovered than they would if this Emergency Legislation had not been approved.<br /><br /> This is also the case with the other two banks. <br /><br />If this would happen (the law being ruled unconstitutional), the payout process would have to be rolled back, which I don't have the imagination to have an idea how to implement. The total claims to the Icelandic government would rise substantially, probably to unsustainable levels. <br /><br />So there is great risk involved in taking on the IceSave debt, much more than discussed. This is a critical point that must be taken into account.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-970611666708740586.post-18140046048388873572010-03-10T14:04:50.811-08:002010-03-10T14:04:50.811-08:00Rebel Economist. Thank you for correcting me.
Th...Rebel Economist. Thank you for correcting me. <br /><br />The spirit of the 2000/12/EC is consumer protection. (Learned articles have been written about this by amongst others, French economist Alain Liebitz.) <br /><br />Normally the British do not feign at the task of protecting their citizens against foreign threat. Why this sudden timidity?<br /><br />Your treatment of the Equitable Life case was disappointing, especially the analogy between people´s life-savings of potentially hundreds of thousands of pounds and the Farepak Christmas debacle on the other hand where people lost a couple of hundred pounds.<br /><br />Another thing: The next problem for the UK is its own bail-out. As you may be aware of, a law was passed in the autumn 2007, which allowed the BoE to lend to financial institution (in the UK, mind you, no discrimination there?) without disclosure. This means that nobody in the UK, including the press knows the extent of the exposure. Anybody worried about that? This is potentially a bigger problem for the British taxpayer than the Icesave case.Björn Jónassonhttps://www.blogger.com/profile/00441633841215181989noreply@blogger.comtag:blogger.com,1999:blog-970611666708740586.post-24629011116391737852010-03-10T12:58:18.218-08:002010-03-10T12:58:18.218-08:00Bjorn,
Thanks for referring me to that undoubtedl...Bjorn,<br /><br />Thanks for referring me to that undoubtedly relevant directive; they seem to get longer the later they were written, don't they? Are you sure though that you don't mean Article 22 (covering the "Power of the competent authorities of the host Member State"), paragraph 8, of Directive 2000/12/EC? That is, "Host Member States may exercise the powers conferred on them under this Directive by taking appropriate measures to prevent or to punish irregularities committed within their territories. This shall include the possibility of preventing institutions from initiating further transactions within their territories."<br /><br />I guess Landsbanki would have protested that they were not doing anything "irregular" or as you put it, committing any "crime", especially in Britain and the Netherlands, where Icesave was essentially just raising funding for Landsbanki. And, if the FSA did not back off, sue the FSA for "restraint of trade", or something like that.<br /><br />When I was a central banker, I resisted all attempts to make me a bank supervisor – it's a thankless task!RebelEconomisthttps://www.blogger.com/profile/13241098878248190971noreply@blogger.comtag:blogger.com,1999:blog-970611666708740586.post-19423988371573507242010-03-10T11:59:35.358-08:002010-03-10T11:59:35.358-08:00Jon, the similarity may be due to the fact that I ...Jon, the similarity may be due to the fact that I have taught finance in a university myself. If people who specialise in studying finance (who are, in my experience, rarely left-wing) tend to reach the same conclusion on a financial question, it might be that this is the most reasonable conclusion.RebelEconomisthttps://www.blogger.com/profile/13241098878248190971noreply@blogger.comtag:blogger.com,1999:blog-970611666708740586.post-60616147295863665402010-03-10T11:39:22.216-08:002010-03-10T11:39:22.216-08:00Andri,
Thanks for your open-minded comments, espe...Andri,<br /><br />Thanks for your open-minded comments, especially if you are an Icelander. Actually, I reckon that if Iceland can see through its present difficulties, it has a brighter per capita future than the UK. In my opinion, a major contribution to the financial crisis has been a failure of the existing developed countries to recognise the challenge that they face from the re-entry of countries like China into the global economy. This process can be expected to weaken the existing developed countries' terms of trade, as increased competition from China reduces the price of the manufactured goods that both types of country sell and raises the price of resources that they both buy, such as oil. Some of the existing developed countries have initially responded (abstracting from the internal mechanisms like asset price bubbles, growing inequality etc that determined their response) to these price developments by consuming more goods and borrowing more to maintain their consumption of resources, especially as borrowing was facilitated by China's high propensity to save. For many of those countries, the troublesome result has been an unsustainable level of consumption and a build-up debt that will be painful to correct. By contrast, Iceland is, in its own particular ways, rich in scarce natural resources like energy, food, clean water and space, so its terms of trade should improve. Iceland may even benefit from global warming.RebelEconomisthttps://www.blogger.com/profile/13241098878248190971noreply@blogger.comtag:blogger.com,1999:blog-970611666708740586.post-67973970191924071852010-03-10T10:27:43.844-08:002010-03-10T10:27:43.844-08:00Anonymous at 9 March 2010 at 16.31:
I am referrin...Anonymous at 9 March 2010 at 16.31:<br /><br />I am referring to the present value of the cost of Icesave compensation to Iceland. If the expenditure is delayed with interest, it will naturally increase in money terms, but remain the same in present value terms if the interest rate paid is a fair market rate that is appropriate for discounting future cashflows. I am puzzled where you get an annual interest cost of 3% from – 44% of Iceland's 2010 GDP is the absolute maximum assuming no recovery at all from Landsbanki assets, and the annual interest costs are presumably 5.55% of that, or about 2.5% of 2010 GDP. So to get to an annual interest cost of 3%, the Landsbanki assets would have to prove worthless and Iceland's nominal GDP would have to shrink by a further 17% in sterling terms.<br /><br />As for the morality of the deposit guarantee, please check out my enhanced discussion of this issue in the post. The point I am now making more clearly there is that the deposit protection scheme existed as much for Iceland's benefit as the depositors' benefit, because its principal purpose was to deter bank runs and therefore stabilise the Icelandic banking system. The morality-testing question is, would existing depositors have stayed with Landsbanki, and could new depositors like those in Icesave have been attracted to Landsbanki, if the deposit guarantee had been denominated in ISK? Not so many, I reckon. And those Icelanders who are quibbling now about the meaning of the DIGF guarantee that covered Landsbanki should consider the future - who will trust a significant amount of money to Icelandic banks in future, if they believe that their deposits are protected by a fund with no government back-up and standing resources of just 1% of the value of deposits and, regardless of the currency deposited, paying compensation in ISK only?RebelEconomisthttps://www.blogger.com/profile/13241098878248190971noreply@blogger.comtag:blogger.com,1999:blog-970611666708740586.post-34531739149158658772010-03-10T10:08:33.040-08:002010-03-10T10:08:33.040-08:00Anonymous at 9 March 2010 at 10:06:
You raise an ...Anonymous at 9 March 2010 at 10:06:<br /><br />You raise an interesting point about the value of the bond from Nyi Landsbanki. This is going to need careful handling, or the (predominantly foreign) creditors of the old Landsbanki will cry foul. To be fair to the creditors of the old Landsbanki, the market value of the bond must be no less than the value of the extracted good bank. I guess that means that the bond should have a larger nominal value the lower its credit rating. At the moment, since Nyi Landsbanki is state-owned, the bond will presumably have the Icelandic sovereign rating, but it should be given an explicit government guarantee to protect its value against any future privatisation of Nyi Landsbanki.<br /><br />My estimate of the cost of the banking crisis to Iceland of about 15% of GDP is quite rough (ie 11% of 44% of GDP, times three given three banks), but it is sufficiently realistic to support my point the cost is a lot less than the "slavery" stories bandied about. Even if the failed bank recovery rate is much lower than the 89% presently projected, the burden is affordable if Icelanders are prepared to make sacrifices. I am often struck by the contrast between peoples' attitude to costs that they incur willingly and unwillingly. When houses cost five times the average annual income, and rise 20% in a year, as happened in some countries during the recent boom, the implied increase in expenditure for new households of an entire year's worth of income is barely discussed. Similarly I dare say that many Icelanders will happily spend 44% of their annual income on a vehicle at some time. This is not just a dig at Icelanders; we British, and the Americans and Greeks, are in my view denying the necessity to reduce consumption as much as our post-boom economies require. I applaud countries like Ireland and Estonia that have accepted austerity to face up to their problems.RebelEconomisthttps://www.blogger.com/profile/13241098878248190971noreply@blogger.comtag:blogger.com,1999:blog-970611666708740586.post-62065838196871879902010-03-10T09:59:34.717-08:002010-03-10T09:59:34.717-08:00DIRECTIVE 2000/12/EC (chapter 22 art 8)provided th...DIRECTIVE 2000/12/EC (chapter 22 art 8)provided the Brits with all the powers needed to stop the banks on their home turf.<br /><br />This directive farce defies all logic. If the police sees a crime committed in the city (say a murder), they would not turn their head away, saying this is not their jurisdiction. How about some common sense here?Björn Jónassonhttps://www.blogger.com/profile/00441633841215181989noreply@blogger.comtag:blogger.com,1999:blog-970611666708740586.post-79709529343640118032010-03-10T09:47:01.574-08:002010-03-10T09:47:01.574-08:00FF, I like your suggestion that small countries sh...FF, I like your suggestion that small countries should require their international banks to operate abroad as subsidiaries rather than branches. If I recall correctly, the British FSA wanted Landsbanki to make Icesave a subsidiary, but Landsbanki was reluctant to commit the resources needed to independently capitalise Icesave, so the FSA had to accept its continued operation as a Landsbanki branch.<br /><br />It is ironic, in view of Icelanders' present sensitivity to any perceived bullying by Britain and the Netherlands, that those countries' scrupulous respect for the competence of Icelandic banking supervision contributed to the debacle. It would be easier if the drive to make foreign banks operate as subsidiaries rather than branches emanates from their home regulators.RebelEconomisthttps://www.blogger.com/profile/13241098878248190971noreply@blogger.comtag:blogger.com,1999:blog-970611666708740586.post-13443413515978362322010-03-10T03:24:22.670-08:002010-03-10T03:24:22.670-08:00This article obviously has its origin in the left ...This article obviously has its origin in the left spin factory in Iceland. There are entire chunks of text practically straight from recent articles by gov sponsored professors up here. <br />An interesting way to push the propaganda, making it look as it comes from abroad. <br />How much did you get payed for this?Jon Steinarhttps://www.blogger.com/profile/07940610654638947427noreply@blogger.comtag:blogger.com,1999:blog-970611666708740586.post-52451678951827257642010-03-09T19:45:10.376-08:002010-03-09T19:45:10.376-08:00RebelBlogger-
Let me first say that I think you ar...RebelBlogger-<br />Let me first say that I think you are spot on about Iceland. In my less charitable moments I refer to it as the ‘land of sometimes brilliant amateurs. ‘ Now, there’s a difference between an amateur professional, and a professional amateur. Reykjavik’s attempt to become a financial center was the collusion of professional amateurs in the political class, and amateur professionals in the business ranks. But regardless of the mechanics, smallness is at the heart of this colossal meltdown.<br /><br />The growth of Iceland’s financial sector was out of control for a little while. Many in Iceland feel that the City took ample advantage of naïve Icelandic bankers and businessmen, fobbing off worthless assets to the amateur professionals. And these Icelanders admit that while the country may have been too ignorant of high finance to enter it so forcefully, they also feel they were being played for a fool, and the smart money and smart governments watched it happen, and didn’t take steps to protect either their own depositors, or minimize the risk to Icelandic taxpayer who might have to ex-post fund the party. It is not my argument, but it is one which I’ve read in various incarnations in Icelandic blogs.<br /><br />One statistic, however, which lends a little support to this line of reasoning is that if Poland, which sported roughly the same banking tradition during the cold war as did Iceland, had seen its banking sector grow as much in five years, then it could have handled all of Europe’s banking.<br /><br />So we find ourselves in this dismal situation. The very small population of Iceland has been asked to complete the almost impossibly complex calculus of which is better: to honor the obligations as stated and soldier on, or to dig in their heels a little longer and hope a better deal can be struck before it’s too late to avoid defaulting on previously outstanding sovereign debt. All cod and kidding aside, need anyone be surprised at the path Iceland has chosen?Andri Haraldssonhttp://www.blogger.comnoreply@blogger.comtag:blogger.com,1999:blog-970611666708740586.post-39975580734161674082010-03-09T16:40:38.889-08:002010-03-09T16:40:38.889-08:00Andri,
No doubt British and Dutch sensitivity to ...Andri,<br /><br />No doubt British and Dutch sensitivity to Icelanders' feelings would help, and should be easier to maintain than in the desperate days of autumn 2008. But, as I hinted in my earlier reply to you, I do think that nations ought to have ambitions and influence roughly in line with their size. Unless they do, Europe will become unworkable as almost any distinct unit of people will aim for independence within the EU, with a ministerial seat in the council, commissioner, governor at the ECB etc; hell, even a six month stint in the presidency every few years. In looking into the Icesave dispute, I was impressed by the range of the Icelandic nation. It seems that, for almost any piece of information I wished to find, there is an Icelandic organisation corresponding to one in the UK, with a helpful website. It is hard to believe that these functions can all be either efficient or world class in a country of just 317,000 people. I did wonder, for example, whether the ex-post funded nature of the DIGF, which is obviously unsuitable for a banking system comprising just three banks, was uncritically copied from the larger European countries with the motivation "we should have one of those".<br /><br />By the way, while I would not deny that any settlement would be onerous for Iceland, I do question whether the terms of the original loan offer were other than fair, and even whether the new offer is better for Iceland. See the update that I have added to the post commenting on the referendum result.RebelEconomisthttps://www.blogger.com/profile/13241098878248190971noreply@blogger.com