Iceland: what does the endgame look like?

Thrainn Eggertsson writes to the FT:

The government of Iceland has now been offered foreign loans that roughly equal the country’s gross domestic product.  The annual interest payments, say 3-4 per cent, approximately correspond to the country’s annual economic growth.  Additionally the loans must be paid up.

I believe Thrainn is being generous with that growth estimate.  Then he compares Iceland to Germany in 1919 and predicts similar consequences (I don’t think he means that as a threat, however).  Instead, I wonder what it is like for a country to be truly, permanently bankrupt.  And a further difficulty lies on the horizon.  Circa 2000, fish accounted for 70 percent of the country’s export earnings.  Here are many articles on dwindling cod stocks, the number one item sold by Icelandic fishermen.

I genuinely cannot imagine what the endgame looks like.


It's pretty easy to imagine the loands being forgiven or repudiated.

Yet when African countries, who often find themselves in this exact situation, ask for this, it's suddenly impossible...

good point momama,

if I recall Honduras was whacked by an natural disaster in the form of a massive 100 year hurricane sometime in the nineties, which proceeded to cause destruction equivalent to a multiple of it's GDP. Wall street bankers and Washington policy types argued that although debt forgiveness might seem intuitive under such circumstances, this would create a dangerous moral hazard, preventing the Hondurans from learning important lessons about planning for long tail events.

Maybe some loan extensions might make a comfortable middle ground allowing the Hondurans to remain diligently focused on the distant horizon as they annually cut that interest check.

obviously with a bonus pool of less than a billion banana's the Hondurans could not retain the kind of deep talent to outmaneuver Washington like the cool aid kids on wall street.

lzl, I think foreign debt of those countries is much lower, so the government debt is hold by their own countrymen.

If your real interest rate is greater than your real GDP growth then your debt/gdp rises forever.

The only solution is that the government runs a budgetary surplus in permanence, and teh country runs a current
account surplus. This is more or less what the likes of Argentina and the SE Asian countries have done since
the Crash of 1997-98 (or 2002 in Argentine case).

Can Iceland do this? By spending less and saving more.

I haven't been able to find out what %age of Iceland's exports are aluminium, but a big factor in its
current account deficit has been the cost of the new smelter. Unfortunately aluminium prices are falling at
the moment.

Low currency will contribute to increased tourism revenues, particularly now that aviation fuel prices are lower.

There are many similarities between Iceland's position and those of other small island nations like Hawaii,
except Hawaii cannot have a currency crisis-- the Icelanders, arguably, should have joined the Euro more
quickly. Iceland does have significantly better energy position than Hawaii due to cheap geothermal and hydro
power, whereas 60%+ of Hawaii's electricity supply comes from fuel oil. However Hawaiians probably have
considerably larger non-Hawaiin investment balances than Icelanders will have once Baugur et al. are sorted into


'massive migration' of 300k people country? ;-).

Magnus Magnusson, a leading TV presenter here, was always proud of his Icelandic origins-- I don't think
it would cause a big stink if 50k Icelanders moved to London. Briefly they owned half the High Street in any
case via Baugur and other conglomerates.

Hawaii geothermal has proven to be disappointing as a source of energy. I don't know more than that.

I would imagine that foreign men with even a little money will now have much better access to Scandinavian beauties.

The endgame is that populist efforts to renege on the debt and put in place a responsible governemnt that operates within a dept free budget will be sabotaged by intelligence agenices working for the banks/lenders. Instead taxes on the bottom 99% of the poeple wil rise as they essentially work as indentured servants for those who lent the money. Collection abilities of the tax collectors will be increased as average people try to avoid the outragous taxes...human rights to private property will be rolled back in the name of the collective interests.

If the left wing puppet party is put in place then debts can be forgiven if all the assets(natural resources/infrastructure etc.) of the country are handed over to the banks/lenders and their friends.

The great debts will be used to for the banks to put in place carbon taxes/exhaling taxes and lot of the global warming hysteria nuttiness.

Zero growth(sustainable) policies will be put in place to guarantee that Iceland does not grow intself out of the problem.

One obvious possibility: Iceland used to be a dependency of Denmark. There's no reason it couldn't be again.

Why not just default?

Take the loan, use loan money to give grants to the civilians to flee.

Tax collecting and Taser prods will be the new growth industries.

As a Swede I have to agree with momama, I think it's offensive to let the Icelanders get off the hook. Unlike the African countries they certainly have no one to blame but them selves.

After Iceland it's Austria which also is basically Game Over, although they can count them selves lucky that they are a part of the EU.

Circa 2000, fish accounted for 70 percent of the country's export earnings. Here are many articles on dwindling cod stocks, the number one item sold by Icelandic fishermen.

Lower supplies should mean higher prices and Iceland being small could brand Icelandic cod as wild caught and better.

OK says primary aluminium capacity will be 765,000 tonnes pa by end 2008. At which point aluminium's share of exports will go from 18% in 2004 to 35% in 2009 according to the source.

Aluminium is currently $2104/ tonne on the LME, so that would be $1.6bn bn pa pace a GDP of c. $12bn pre Crash. However aluminium has been as low as $1000/tonne during previous recessions (eyeballing the graph) (and as high as $3000).

If Iceland can further develop its carbon free geothermal power that could be a major advantage-- server farms and other carbon-intensive industries would continue to locate there (it's politically stable, there is bandwidth trans Atlantic and a skilled local workforce-- a la Google's new server farm in North Carolina). There is also talk about a power cable across the sea to Scotland (the real problem will be the domestic political issue of getting that power south to England, where the demand is)-- a subsea DC cable of that length is certainly feasible and would have power loss of sub 10%.

Regarding the EU, the main reason Iceland has refused to join
(it has been invited several times, I believe), has been that
it did not want other EU countries having access to its fisheries,
which it guards zealously, occasionally even with some violence.

I ran into Thrainn Eggertsson at a conference in Paris about
a month ago. He had just managed to get his funding for a year
in Berlin out of the country from his university before all
foreign exchange transactions were shut down.

Iceland faces the same options an individual debtor does. Pay it off slowly (heavy tax), sell something to pay it off, or default. They should sell rights to their fishing grounds. They'd still own the onshore processing plants and ancillary services, which any bidder would have to use - and they could charge for these other services in dollars.

The US national debt is $10.5 trillion. The US GDP is $14.5 trillion. We're in negative economic growth so our annual interest payments easily exceed our annual economic growth. (It is easy for a positive number to exceed a negative number.) Even in good times our GDP growth will at best be similar to interest on the debt.

Based just on this measurement, the US is just as f***ed as Iceland.

Partial default, perhaps by renegotiating the maturity of the debt. Then pay back, slowly. They will be back to financial health in 10 years.

How about building some long boats and returning to their roots?

Yes, we Icelanders deserve this as our Norwegian and Swedish brothers have pointed out. This has little to do with the everyday Icelander, but rather few bankers, entrepreneurs, the financial authorities of Iceland and the central bank of Iceland. We are in a bit better situation than many less developed countries. We have all the infrastructures available, a very high education level and good schools, a LOT of natural resources and energy. So we should be quick to bounce back if we get a little help. Yes, a little help, we are not lost case like many countries that always return to the ways of corruption and lack the education and infrastructures to be able to get on their feet. It is nice to see which of the Nordic countries are our TRUE friends, Yes, the people of the Faroe Islands. Remember the average Joe of Iceland has nothing to do with the situation. The Icelandic media was owned by the same people that destroyed the banks, we never got the truth from that direction. We were lied to and told that everything was OK. For that we can not be blamed.

Austrian banks have indeed a large exposure to emerging markets and also own many local banks Eastern and Eastern Central European countries. Nevertheless, one should not exaggerate the consequences; with the exception of Hungary, these countries, especially their private sector, are not in financial meltdown. Furthermore, they have a lot of experience in these countries. The Austrian government has, however, begun to inject capital in financial institutions to alleviate fears and prevent downratings for these banks. Two banks had to be saved thus far: One, Constantia Privatbank, because of shady dealings that had next to nothing to do with the financial crisis; the other one, Kommunalkredit, because it ran into refinancing trouble. Funny detail: Its main business is lending to communes and provinces.

"Isn't the GDP of the United States roughly equal to its debt (~$10 trillion)?"

It depends on which "debt" measurement you use. Current GDP is about $14.5 trillion. Regardless, as I noted above, if America's whatever-debt-you-want-to-use-to-GDP ratio portends doom, there are a lot of other major economies that are in even more trouble.

That $10 trillion figure for US debt includes somewhere around $4 trillion of debt we owe ourselves (money borrowed from the Social Security Trust Fund for general operations, for example). So in a pinch, I bet we'd forgive ourselves that burden.

"If your real interest rate is greater than your real GDP growth then your debt/gdp rises forever."

Please think before you post, or improve your math skills, or both.

Icelanders will do just fine. They will pay off a good chunk of their debt after they settle a massive lawsuit against the British government for the abusive, unjustified actions which pushed the Icelandic economy over the brink. There is a lot of blame to go around. The Icelanders (or rather a handful of reckless, under-regulated, Icelandic businessmen) brought Iceland close to the brink, but the British government pushed them over the brink, into the abyss, with their abusive and misguided actions which brought down the entire Icelandic banking system.

In addition, Iceland has great natural resources, strong infrastructure, a highly educated, skilled and hardworking workforce, and great national pride which will drive them to show the world what they are made of. Just watch!

Tax haven for super-rich Americans --- That's the ticket!

"Iceland should stiff the UK and deal with the consequences."

Icelanders are too proud to walk away from their debts. But, ... they should not accept more debt than they legally have to. The British government, after destroying the Icelandic banks, is trying to bully the Icelandic government into accepting liability for british deposits in those banks far above and beyond what the Icelandic government is legally responsible for. The Icelandic government MUST stand up for the Icelandic people and refuse to be bullied, even if it means frayed relations with a (former) friend and ally. Icelanders can't afford to be nice when it comes to these kinds of amounts.

Maybe they should nationalize Björk.

'massive migration' of 300k people country? ;-).??
Mariel : 100k in 3 months

We did pretty well with Louisiana, so why not just purchase Iceland, as a coldwater counterpoint to Hawaii? (We could just borrow the money from our grandchildren.) Plus, they would get two liberal senators, which might give the Democrats a filibuster-proof majority.

I would love to see a comparison between Iceland today and Argentina in 2001. If you are bankrupt, there are options, including declaring bankruptcy and telling your creditors to shove off. Of course, as has been proven in numerous depressing arbitral awards against the Argentine government, that option can also be very expensive, but perhaps not as expensive as the numbers you are suggesting.

Again, I would love to see an historical analysis here if anyone is interested...


If your debt: GDP > 100%

If my maths is wrong, do feel free to demonstrate it.

The purpose of a blog is to exchange information and views.

So I'll exchange a view for your information:

'if you cannot trouble yourself to be polite and you simply call someone 'stupid' (ie an ad hominem attack) and make presuppositions about their behaviour rather than 'incorrect' (and show why you believe them to be incorrect) then you are a guy (or woman) who is adding nothing to the blog, and in addition is being quite passive-aggressive, suggesting anger management issues'

What Gunnar said, upthread.

Also what Rob said.

As an Icelander, it annoys me to be told that I am culpable because I participated. Participated in what? Like many of the little people in Iceland I had my savings in the bank, savings that have been frozen for several weeks and may not amount to much when released. I lived within my means. The excesses of some of the entrepreneurs and bankers here belonged to another world - alien to me and many others. I didn't understand it, and trusted our regulators to do their jobs properly. They didn't. Our government and Central Bank failed, and when the house of cards started to collapse made a series of hapless mistakes, exacerbated by totally unacceptable behavior on behalf of the British Prime Minister and Chancellor of the Treasury.

That said, all is not lost, and despite the massive debts we're taking on as a nation I know we will be fine. Icelanders are proud, have a strong work ethic, and in times of adversity we band together. We have excellent natural resources and a highly educated workforce. Other Nordic nations have bounced back from economic collapse, and we will too.

If Alda and Gunnar and Rob are any measure of the people of Iceland, I wouldn't worry too much about them.

I'd hate to have been one of the bankers that blew through all their savings, though ...

perhaps rob would care to share the source of his knowledge that the UK is trying to bully Iceland into more than it's legal obligations during their (non) negotions. I don't know as there has been no detail. If they are, then they shouldn't be.

I assume he has/had no money in Icelandic accounts. Neither did I, so I have no special interest. To state catagorically that the UK "pushed them over the brink" is, however, utter nonsense. They were already over the brink and plummeting. The UK Treasury was trying to catch what it could.

Iceland will bounce back for all the reasons people have stated. Their smallness was lethal, now it is an advantage. Much easier to turn a dinghy round than a supertanker. If the situation becomes really dire and prolonged, there will innevitably be a brain drain. All their brightest will be perfect English speakers. Which may be a problem on top of the other problems.

It is concerning, however, that the true authors of this calamity are still running the show, totally, and there doesn't seem to be a huge dynamic to replace them. They're very happy to see a spat with the UK, as it's a very effective diversion. It's working a treat domestically at the moment.

If there were some impropriety in the UK government's action, then that will be settled in court. I would have thought there were other priorities however.

rob, I've read every article there is on the subject and the only indisputable fact is that all the facts are disputed.

The only assets remaining frozen in the UK are those of Landsbanki. KSF is continuing to trade in administration. My business's monthly DD for insurance went out to KSF as usual this week. There is a lot of hubris and you need to hack through it.

Sure, it's a collosal problem for a tiny country. What I don't share is this "aw, it's only a little country - stop bullying it" sentimentality. It didn't think of it's size limitations when it took on the big boys and waltzed into UK savings and High Street. It owns the largest ready meals manufacturer in the UK - if that went down, the nation would starve :)

It cannot put on a puppy dog face and say "leave us alone" (which is precisely what the 60,000 who signed the "we are not terrorist" petition are saying). The ordinary people are not to blame, as we are not for the invasion of Iraq. We have to meet our obligations in that regard however, and the Icelanders have to meet theirs - which will be painful.

More about the UK action will trickle out, and it won't be the black and white situation many seem to think. Bjorgolfur Gudmundsson let one cat out of the bag this week on Icelandic TV. He says the UK offered to take control of Icesave accounts just one week before the collapse, for a colateral of £200M from Landsbanki. It couldn't even raise this, so asked the Central Bank for a loan (this is denied by Haarde - they're beginning to scrap like Republican Party). It was not forthcoming, and the rest is history. What the heck was the UK supposed to make of that?

As for Kaupthing S&F, those arguing it was in robust health and only fell because of the UK action are in denial. It was barely more credible than Glitnir or Landsbanki and the UK FSA were about to move on it in any case as it did not meet the liquidity test for a UK bank. Kaupthing Iceland sold 37 of it's 40 million shares in KSF on 29th September. Sound like a vote of confidence to you?

I don't want to see Icelanders starve (and they won't), but we're not in a charity arena here. The UK has lived beyond it's means for the recent past, but Iceland has done that three fold. We both have a painful future.

Alfisti, nobody is asking for your sympathy or charity, but neither do Icelanders deserve your mockery or UK's bullying.

I stand by my point that UK totally overreacted and made a bad situation worse, not only for Icelanders, but also for the Icesave account owners. Iceland was trying to navigate a difficult situation, and they might have succeeded in keeping things afloat, until they got torpedoed by Brown and Darling.

I also stand by my second point, that Iceland must stand up to UK's effort to force Iceland to negotiate under duress. Sure there are disputed claims going around, but the facts certainly seem to suggest that UK wanted a rushed settlement and it wanted the desperately needed IMF loan to be contingent on such a settlement. If that isn't bullying, I don't know what is.

That's a good question, which no one seems to be asking (or answering). Maybe you have seen the assets and debts of the banks listed as over 100 billion, with assets about 10 billion over debts. So where did the money go? One answer might be that the banks held cross equity shares with one another, maybe 30-40%. That shareholding might represent 30-40 billion of their assets, and now that the bank shares have collapsed those "assets" are worthless -- vanished into thin air. Plus the shares that they did hold in "real" banks and other financial institutions and retail stores have crashed in value with the general collapse of the markets. They definitely owe 60 billion (20 billion to the Germans). The real value of their assets in unknown - you will have to see what they sell for out of bankruptcy the next year or two. It could be in the 20-40 billion range, who knows.

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