The Difference Between Iceland and Ireland: One Letter and the Ability to Default

Good news for a change. While Iceland was one of the first countries after the collapse of Lehman Brothers to get an IMF bailout, it is, according to this Reuters report published in the Irish Times today, starting to come out of recession.

But does the article tell us how this came to pass? Not really, at least not in an entirely honest way. Look at what it says about the IMF loan and the banks:

"Iceland's top three banks were hit hard by the global credit crisis in late 2008 after expanding rapidly across Europe and the crash triggered a deep recession and the island's gross domestic product (GDP) fell 6.8 per cent in 2009.

But, helped by an IMF-led bailout, the economy and currency have stabilised."

The joke doing the round two years ago is perhaps too well-known to repeat, but the comparison is there, and it was taken up by Sigrún Davíðsdóttir in Icelog a couple of weeks back. While comparing what happened in Ireland to Iceland she says, the reason her country might be on the road to recovery is because Iceland wasn't able to save any of their banks. Basically, they were hit so hard that they collapsed completely. But it's not even that they were 'hit hard'. It was more that even the smallest one was too large to be saved by the Icelandic economy, which stresses that the grotesque structure of the banking system itself was the source of the problem.

As Sigrún puts it:

"Because of the enormous size of the Icelandic banking sector, compared to the Lilliputian country, the government couldn't save the banks. That it would have liked to is clear but Iceland really didn't have the choice: bankruptcy was the only viable option. It took a heroic effort to make the transition from the old banks to the new ones as smooth as it was. The payment system didn't go down and deposit holders had access to their money all along.

The three Icelandic banks were split up: the foreign debt was stacked into the bankrupt banks, under the auspices of resolution committees, the domestic debt went into the new banks founded on the ruins of the old ones.

In this way, deposit holders were safe and saved, bond holders felt the pain and the loss. And why not? Bond holders, those who lent money to the Icelandic banks, are mostly other banks and financial institutions. They should have known better than to heap loans on banks in a tiny country. But they probably didn't even need to worry too much about their losses. In most cases their loans will have been insured. There must be some smarting insurance companies out there."

The collapse of the Icelandic Krona and relatively high unemployment rate (5% which is very high for Iceland) have meant that despite this technical move out of recession there is still a great deal of hardship. But at least there is hope that they're headed in the right direction, and are not looking at the prospect of any future growth being used to pay off foreign bondholders and/or the interest on a IMF/EU/ECB bank loan. So while the Icelandic government had no choice but to use bankruptcy to get out of its problems it meant that the citizens weren't forced to pay for the banks debts – and they got a great deal of transparency too. Iceland's banking enquiries were much more detailed and their level of debt exposure is known. Their SIC report is 2600 pages long, compared to Honohan's clocking in at 117 pages, and Max Watson and EFSF-manager Klaus Regling's at a mere 49. Most of those who were in place in Irish banks when most of the steering of herds of cash around the credit prairies was being done are still there and any replacements are hardly from institutions that are without blame for other disasters. Similarly we still don't know how much the banking disaster is going to cost us.

Considering that the weather we have now is more appropriate for Iceland it's might be worth mentioning this chilling reminder from Sigrún, that when Iceland's banking crisis was front page news Irish politicians spoke of their horror of Ireland going down the same route. Fortunately for us they said, we are in the Eurozone. Perhaps, but it is worth looking towards Greece in this respect, the only previous country in the Eurozone to receive an IMF/EU/ECB bailout. As Michael Youltan has pointed out on ILR, rather than showing some sort of recovery the effects of the deflationary measures imposed so far are making a mockery of the suggested growth projections that repayments of the loan are based on. Even the special representative for the troika in Greece, Paul Thompson, has been quoted as saying that the government's projections are not realistic. Fortunately, I guess, for the Greek government at least, they've managed to postpone when it will start to pay back the loan. Michael argues that the economy is simply not in a position to pay this back and it will have to default at some point.

It is interesting then to consider this in light of what Iceland did and to remember that there was no debt restructuring included in the Greek bailout, even though it is well known that bailouts usually come with some form of debt forgiveness. It is worth remembering too Fine Gael's Michael Noonan's disquiet in the days before the final terms of the IMF/EU/ECB loans were announced. On Prime Time before the final announcement was made he expressed his disappointment that it seemed that while the IMF were not set against the restructuring of bank debt as part of the deal the EU/ECB most certainly were. Noonan's disquiet came from the fact that his party felt that they were owed a little respect having worked so hard to sell the Lisbon Treaty of the Irish People. Where is class solidarity when you need it, eh?

So while the joke went, the only difference between Ireland and Iceland is one letter and six months, here we are two years later, just as the prospects for Iceland are starting to look better because it had to burn the foreign bondholders, while Ireland takes a further 6bn out of the economy, placing most of the burden of that adjustment on those with low or average earnings. And because we are unable to restructure the huge debt burden brought about by our egregious banks we are faced with a deepening deflationary spiral.

So, thank goodness we were in the Eurozone, so we can't devalue our currency, so we can't restructure our debts, and so we can't afford the cost of providing the 2009 levels public services that, as Michael Taft pointed out on #budgetjam already, are well below the Eurozone average. But we can, it seems – despite the 'small' size of our economy - pay back the debt incurred by the decisions of the Irish government to deflate the economy and to protect the banks, and pay for a loan from a fund that as Former head of the German Central Bank Karl Otto Pöhl said in Der Spiegel recently, "was about protecting German banks, but especially the French banks, from debt write offs".

Lucky us.

(Image via Empyreal on Flickr)