There’s no rioting in the streets on Iceland:
Iceland’s President Olafur R. Grimsson said his country is better off than Ireland thanks to the government’s decision to allow the banks to fail two years ago and because the krona could be devalued.
“The difference is that in Iceland we allowed the banks to fail,” Grimsson said in an interview with Bloomberg Television’s Mark Barton today. “These were private banks and we didn’t pump money into them in order to keep them going; the state did not shoulder the responsibility of the failed private banks.”
This seems smart:
Iceland’s banks, which still owe creditors about $85 billion, were split to create domestic units needed to keep the financial system running, while foreign liabilities remained within the failed lenders.
(via Atrios)
James K. Polk, Esq
Will Iceland end up feeling repercussions from this $85 billion owed?
Comrade Mary
That’s all I heard on the CBC this week: why, oh why did the Irish do this? Was this a stupid, impulsive move meant to make the government look competent (ha!) or was this a little quid pro quo?
Michael
Ireland’s cave-in is just the continued tyranny by the UK by economic means.
I’m really beginning to understand every violent left-populist movement from the past century.
Sly
@Comrade Mary:
It’s a question of options. In this situation, all options are bad. So the question becomes which option is the least bad? Because Ireland lacks monetary sovereignty, it has fewer less-bad options than countries that still have monetary sovereignty. Like Iceland and, as it happens, the United States.
Maude
@Sly:
In a way, I do think the US is going to come out of this okay.
Linda Featheringill
The Irish have been, are being, and probably will be screwed over. That is a simple fact.
Has the Irish government ceased to serve those it governs?
This is a question only the Irish citizens can answer. But I would understand a desire to take this government down and install another one.
And while they are at it, revisit the Euro thing.
As I suggested before, send the children out of the country to visit Aunt Edna and then raise holy hell.
Gordon Guano
@Sly:
So adopting the euro wound up biting them on the ass? And all this time, I had this vague little fantasy that Europe was getting its act together and getting capitalism, if not right, less wrong than we were. But it’s the same shell game going on everywhere, I guess.
c u n d gulag
In the US we had to prop up the banks!
I mean, if we hadn’t, the sons and daughters of the really rich MFers wouldn’t have inherited enough to even warrant ‘Death Taxes!’
And we couldn’t have that now, could we?
Sly
@Michael:
Not really. What is really driving the austerity discourse in Europe is the ECB, which ultimately accountable to Germany.
Sly
@Maude:
Okay is a relative term. If it makes you happy, I’ll rephrase: Iceland and the United States will come out of this mess less-not-okay than Ireland.
@Gordon Guano:
It’s not so much the adoption of the Euro, or a single currency in general, but the adoption of a currency that is being controlled by another country with its own set of interests. While the ECB’s voting system suggests its accountable to all nations in the Eurozone, in practice the central bank is beholden largely to German financial interests.
Michael
@Sly:
While the austerity nonsense is German-driven, the root cause of the collapse is thoroughly rooted in Fleet Street speculation and the demands that the gamblers receive 100 cents on the Euro.
Maude
@Sly:
I should have used a better phrase, but we aren’t going into full collapse.
Alex S.
@Michael:
Sometimes I wonder if the Germans are actively sabotaging the Euro to keep it weak enough for their exports.
jcricket
@Michael: I thought at least the Germans were demanding Ireland stop acting like a tax haven.
Seems all I read in the papers is about how unless Ireland and Greece and whomever fucks the middle class and poor and leaves the banksters alone, the markets will tank and businesses will shrivel up and die.
Sly
@Michael:
True enough, but those interests are London-based largely because London is the largest financial market in Europe, not because members of those markets have any particular hatred for the Irish. In other words, UK and German financial interests are somewhat in accordance, though I would argue that if the Germans completely had their way Ireland’s situation would be much worse. The ECB wanted an austerity package several billion euros bigger than the 15b dictated by the IMF.
Sly
@Alex S.:
If it walks like a duck and talks like a duck…
Linda Featheringill
@jcricket:
If the Irish people are in pain anyway, would they have that much to lose if there is a business downturn?
It’s not my place to decide this, but I do think it is an appropriate question.
Ned Ludd
Paul Krugman has a chart comparing the two economies. Iceland’s GDP has dropped slightly more, but employment has dropped significantly less – just under 8% in Iceland, versus just over 13% in Ireland.
Here’s what the IMF says about Iceland:
Devaluation and default seems to be an effective way out of these messes.
J. Michael Neal
Note that this was not an option for Ireland. It’s something Iceland could do only because they are not a member of the EU, and thus not subject to EU law. No one could sue the banks or the government in any court that was not in Iceland.
Ireland is a member of the EU. It is subject to laws from Brussels. If it takes an illegal action, it can be sued in European courts. And an illegal action is exactly what Iceland undertook. It may have been a good thing despite its illegality, but it was illegal.
What they did was to take the banks and split them in half, giving the domestic half the lion’s share of the assets, and sticking the foreign half with the lion’s share of the liabilities. That’s just about the most fundamental violation of bankruptcy laws I can think of.
When an individual declares bankruptcy, there are a few assets that are considered protected, and which cannot be seized to fulfill creditors. That isn’t true with corporations. It is supposed to be the case that all of a failed business’ assets be used to satisfy creditors. You don’t get to shelter them, and say that we are going to keep the assets, and you can hold on to the loans you are owed, but there’s nothing to pay them off with.
Limited liability doesn’t work if you start monkeying around like this. If the government can simply step in and declare that, contrary to what you thought, you didn’t loan money to the whole company, based upon all of its assets, why would you ever loan one your money? No one in their right mind would make a loan to one party, while expecting to get repaid from a third party that doesn’t have any assets.
And, again, this is why the creditors in the US had to be paid off in full. The only alternative was to send them through bankruptcy, where all of the assets would have been taken to satisfy the creditors. That would have included all of the premium money that had been paid to AIG for coverage and annuities, given the order in which creditors must be satisfied. All gone. Anyone who had been relying on an AIG annuity would have lost it. That’s the hammer Goldman and others held in the negotiations.
Ned Ludd
@Ned Ludd:
Just to be clear, these are not the levels of unemployment. These are the percentage of jobs that have been lost during the downturn.
Comrade Kevin
@J. Michael Neal:
Whose laws were they violating?
patrick II
@J. Michael Neal:
I agree. I would only add that it seems to be an unstated wish that the U.S. could do something as effective. But this particular answer is not for us. Even if the U.S. was willing to create similar nation friendly bankruptcies and “bankrupt” or essentially cancel only the foreign obligations of U.S. banks, the amount owed by the U.S. is much larger and the impact of writing off that debt would have broader implications across world financial markets than Iceland’s abdication of foreign debt.
It sounds great — just don’t pay back the foreigners — but it is not a solution I think we could use without danger to the world economy.
J. Michael Neal
@Comrade Kevin: Their own, which pretty were pretty standard. Technically, I suppose, it wasn’t illegal, since it was done through an act of the legislature, but I consider that, at best, to be a technicality. They had bankruptcy laws set up, and then, at the last minute and long after people had made contracts based upon the bankruptcy laws as written, changed it in order to keep the assets out of the hands of the creditors.
Roger Moore
@J. Michael Neal:
That’s the problem with dealing with a sovereign. They’re free to change the laws and legalize something that was previously illegal. And, as a practical matter, Ireland rewrote the rules partway through the process, too. It’s just that their rewriting of the rules, by explicitly taking on their banks’ bad debt, was designed to benefit the elite at the expense of the masses rather than the other way around. Somehow, though, there wasn’t the same kind of protest when that happened.
Damien
@patrick II
So basically there was nothing illegal about it, you just don’t like it and feel it’s illegal. Got it. Boy am I glad you’re not a cop in my neck of the woods.
As far as the world economy? A long-range thinking sovereign will factor the damage it’s actions may take on a global stage, but their ultimate responsibility is to their own citizenry. If they come out better off than they would otherwise, the actions taken are entirely the correct ones. If not, they were short-sighted.
Linda Featheringill
Old Talmud teaching:
You will live by the law. If you cannot live with it, change the law. Then live with the new law.
Edited to add:
Someone who knows what I’m talking about is welcome to make any corrections here. I can’t find it online.
liberal
@J. Michael Neal:
So how do those principles apply to the changes in US bankruptcy law a few years ago?
liberal
@patrick II:
Huh? The explicitly stated wish is that the taxpayer should not be making bondholders in insolvent financial institutions whole, foreign or domestic.
gene108
From what I’ve read about the European debt crisis, from Krugman’s writings in the NYT, I think currency devaluation is the key to Iceland’s stability versus Greece or Ireland, which are on the Euro and cannot devalue their currency.
I’m not much of an expert on this matter and find foreign exchange to be pretty confusing, but the gist of what I’ve read basically boils down the fact when you devalue your currency, it becomes cheaper to carry whatever debt you have.
Basically, you borrowed $1 and now are paying off the same $1, with a unit of currency worth .50 cents, therefore you can pay off twice the debt by devaluing the currency.
I think the big risk to currency devaluation is inflation, but I guess that might not be an issue for a stalled economy like Iceland’s.
Yutsano
@gene108:
They may also be taking steps to alleviate that stalling. I’ve noticed a lot of Travel to Iceland ads on buses and billboards here, so I’m thinking they may be re-working their economy to something more touristy based. I have to admit I’d go, though I’ve heard nightmares about the Reykjavik airport.
Brachiator
Iceland didn’t simply let their banks fail. They deliberately stiffed their UK creditors.
And some of the “let ’em fail” proponents pay attention to Krugman, who in the past championed Sweden’s handling of a 1992 bank crisis.
Others have correctly noted that Ireland’s situation is complicated because it is a member of the EU.
liberal
@Brachiator:
IIRC, Sweden made bondholders whole. While I agree with a lot of what Krugman says, I think he’s wrong on this. Making bondholders whole is (a) inequitable, in the absence of explicit government guarantees, and (b) creates moral hazzard.
Brachiator
A good summary of Ireland’s austerity program can be found at the BBC news site (Irish Republic’s austerity plan: Key points at-a-glance)
A few tidbits:
Can’t touch that corporate tax rate. I understand some of the reasons for this, since some think that this is necessary to encourage development, but you have to ask, at what cost?
jcricket
@Brachiator:
This is what I keep asking. If the only way to keep an economy afloat (and I don’t buy this, mind you, but it’s the story line) is to give the rich and corporations whatever they want, and the cost is that everyone below the top 5% become really poor, something is seriously broken.
Again, as I said, I don’t buy this. Small increases in corporate tax rates, increases in taxes on rich folks, and reasonable regulations don’t lead to economic catastrophes. Yes, the wealthy and corporations bitch all the way along, but sensible taxation, combined with a normal period of economic growth, leads to better infrastructure, lowering of the deficit and seems to also result in better economic conditions for all, bottom 95% and top 5%.
george
this is all about being owned by the Banks. choose whom you want to be in debt to. your country or the Banks.
in Ireland’s case. the banks bought the gov, just like here in America. Iceland told the banks no thanks. at least they get to start over.
choices choices choices.
Brachiator
@jcricket:
In the case of Ireland, I don’t think it’s just a case of giving the rich and the corporations what they want. For a number of reasons, the Irish government, which at first gave all kinds of signals as avoiding a bailout, really thinks that the lower corporate tax rate is essential to their long term prospects. They may be wrong, but it is, for now, a key part of their recovery plan.
There is another poster, burnspesq, whose work activities might give him insight into some of these issues. Perhaps he will post something that gives background into this.
Roger Moore
@jcricket:
They don’t want to kill the golden goose. Ireland has attracted a lot of businesses by offering low tax rates. They’re worried that raising the corporate tax rate will drive those companies away, reducing direct revenues and further damaging the economy with the loss of jobs. I don’t know how realistic those fears are, but there’s every reason to think they’re genuine.
J. Michael Neal
@jcricket: In the case of Ireland, there’s more to an unwillingness to collect tax money from corporations involved. About 20% of Ireland’s GDP consists of shell companies that don’t involve any economic activity in Ireland at all. The only reason they’re in Ireland is to launder money through the Irish subsidiary in order to pay the lower Irish tax rates on their profits.
If Ireland raised the corporate tax rate, all of those subsidiaries would leave. Ireland’s GDP, and their tax collection, would promptly fall by 15-20%. Since these companies don’t have economic activity, and thus fixed capital, in Ireland, it would be easy for them to just shut down their Irish operations.
Aside from any other problems that stem from raising corporate taxes, the increase on the remaining corporations would have to be at least as much as what was being collected from the corporations that leave just in order to break even. Ireland has managed the impossible: it is, indeed, true that raising tax rates will lead to lower tax revenues. That’s quite an accomplishment, and leaves them in a real bind.
It’s also a perfect example of the fact that GDP can be very misleading, and GNP (gross national product) is a better measure of actual economic activity.
J. Michael Neal
@liberal:
I was opposed to those too, for some similar reasons (as well as some different ones), but they really aren’t comparable situations. That instance did not involve taking specific debtors and changing the bankruptcy laws in order to stiff specific creditors. The message there was that, if the government doesn’t like the debts owed to you, they can just wipe them out. That’s extremely toxic.
The change in US bankruptcy laws wasn’t nearly that drastic. I do believe that debts accrued prior to the change in the law shouldn’t have been subject to the tougher requirements imposed. It was still nothing like what Iceland did. Iceland decided to make domestic creditors whole, and told foreign creditors to take a hike, on what were roughly the same debts.
J. Michael Neal
@Roger Moore: As I said, those are extremely realistic fears, because a large number of those companies never really moved to Ireland in any functional way. It’s just a tax haven.
It’s why my sympathy for the Irish is limited. Yeah, they’re getting screwed now, but a good chunk of their previous wealth was created by providing a huge tax dodge that siphoned away tax revenues that should have been collected by other countries. It’s also why you see the rest of the EU playing extreme hardball with them.
jcricket
@J. Michael Neal: OK, this makes a little more sense now – but isn’t this just kicking the can down the road a bit (a la California and Greece)? Sure, they’ll get to keep the tax dodging multinationals, but with the cuts in employment, services and increased taxes, won’t the real impact be basically just as bad?
I can’t see anything but a default in a couple of years in Ireland’s future.
Again, I’m not a “let ’em all fail” kind of guy. I prefer the Swedish model (or something similar) to limit the pain to real people, maximize the return to the government, but minimize the moral hazard along the way.
Maybe it’s b/c I’m not Irish and don’t know anyone living there, but if 20% of their economy is a complete sham, this can’t help but be the inevitable end of it, one way or another.
Course that’s probably true of us, as well. Great, so we’re all doomed. There’s no answer, now that we’ve all allowed corporates to inflate our economy to the point where if we call them on their bluffs, we suffer; and if we give in, we still suffer.
Fuckityfuck.
J. Michael Neal
@jcricket: Oh, I agree that Ireland is going to have to default eventually. There’s no way they can pay all of this off.
jcricket
@J. Michael Neal: So, in the meantime they’ll starve the poor and middle class while doing so.
Wouldn’t it be better to rip of the bandaid, and take the cost of the default – which will surely hurt the economy and cause some unemployment – but without the punishing middle class tax hikes and social service cuts?
I liken the bankster class to that unattainable girl in the teen movies. You change your entire personality, get rid of existing friends and ignore your studies in order to get the girl, and attempt to buy her love with fancy things you can ill-afford – then she just laughs at you and goes off with her rich friends.
Roger Moore
@J. Michael Neal:
Instead, it did just the opposite. It took a specific class of debtor and denied them the same kind of effective bankruptcy relief that other debtors received. Per usual, it was an attempt to help big businesses at the expense of the little guy.
In any case, I think you’re being unfair to Iceland, or at least criticizing them for the wrong reason. By the time they collapsed, the big Icelandic banks owed something like 6 times the GDP. There was no way Iceland could make the banks’ creditors whole, no matter how hard they tried. So they could either protect their own economy to the extent they could at the expense of the foreign depositors, or they could make a futile attempt to backstop the banks, destroy their economy, and still not be able to make good. The big mistake was letting the banks grow to the size they did. Once that happened, the foreign
speculatorsdepositors were screwed no matter what emergency measures the Icelandic government took.J. Michael Neal
@jcricket:
Or default, and the poor and middle class starve because they don’t have a job and the government can’t afford much in the way of programs because it can’t borrow. The poor and middle class are going to suffer no matter what the government does now.
This bailout doesn’t really matter much to the Irish population either way. All that’s happening here is that the EU is bailing out financial institutions, mostly in other EU countries. It’s not actually causing the Irish austerity.
That decision was made when the Irish government bailed out the Irish banks. Much like here, the consequences of not doing would have been enormous. In retrospect, it might have been better just to let them go bust anyway, but I’m not sure.
On a default, it cannot be overemphasized how problematic it is for a country to do that when not only are its debts denominated in a foreign currency (which the Euro is, primarily, for any particular member country except maybe the Germans), but it can’t even control its own monetary policy. Without the ability to devalue *and* an inability to borrow, the economy gets choked off. What’s going to power it?
Even if they could devalue, that would be another way in which the poor and middle class would be hurt. A devaluation is effectively a wage cut. It is exactly the same thing as cutting the minimum wage, except that the government doesn’t have to be honest that that’s what it is doing.
Actually passing an austerity budget has the virtue of being honest about doing things that are inevitable at this point no matter what the government does.
J. Michael Neal
@Roger Moore: As I said, it may have been the right thing to do despite its illegality, but that doesn’t change the facts that:
1) It was still illegal, and
2) It is something that neither the US not Ireland had the capacity to do, Ireland because it is integrated into the EU, and the US because I really doubt that the courts would have allowed such an action to stand, which doesn’t matter anyway since you couldn’t possibly have gotten such a bill through Congress in anything like the requisite time.
Iceland has an advantage that this is likely a one time event for them. There’s no reason to make Reykjavik a global financial center absent the Wild West fashion in which they structured things over the last decade and a half. That’s not true of the US.
If you pass a law allowing the repudiation of debts in that fashion, it sits there on the books. It is going to be litigated over for years, during which time all of those assets are tied up in court, and it’s going to set not only the precedent of doing that in a crisis, but also all sorts of legal precedents that are going to get cited in the future. Given that the US is a place where large scale global interactions are not only logical, but pretty much required, makes that a real problem.
Edit: And to address your last point, yes, foreign creditors were screwed regardless, but they shouldn’t have been screwed out of all of their assets, but only most of them and to the same extent that domestic creditors were screwed. That’s one part of what they did that I highly doubt US courts would have allowed to stand.
chopper
i love how iceland’s government is acting like they orchestrated the whole bank failure. iceland’s government was chock-full of right wing nuts who helped create the mess and didn’t know how the fuck to deal with it. things are turning around there not because of the government’s actions but in spite of them.
as someone somewhere else said it best, iceland’s own version of the republican party pulled a homer – succeeding despite idiocy. icelanders know this.
mclaren
Another important reason why Iceland has done so well: they instituted capital controls. Foreigners with investments in Iceland can’t just dump ’em and pull all their money out instantly.
Which logically leads to the suggestion that maybe the rest of the world should implement capital controls–
…Nahhhhhh! That would prevent casino capitalism and inconveniece our Galtian overlords.
J. Michael Neal
@chopper: Actually, the government fell immediately upon the crash and the Social Democrats and Greens took over.
lawguy
@J. Michael Neal: Well it does seemed to have worked for Iceland and it’s citizens and aren’t those the ones the government of Iceland should be worried about?
Essentially you are arguing that the people who gambled and lost should be made whole, and they should be made whole by hurting the vast majority of citizens who did not have anything to do with this gamble. What am I missing. Laws are changed everyday to make life easier for the wealthy and powerful, why shouldn’t they be changed to make life easier for the vast majority.
J. Michael Neal
@lawguy: That would be a fine idea had Iceland planned to give away large amounts of the money they would have made if there had been no crash. They gambled every bit as much as the foreigners did, and made a lot of money from other people while things were good. Then, when things went bad and they would have had to pay money out to others, they ended the game and told the foreigners to get lost. Icelandic gamblers weren’t stiffed.
If the Icelandic government wants to take the position that it’s only concern is satisfying Icelanders, everyone else in the world should keep that in mind, and never sell them anything on credit, since they don’t feel any obligation to repay, or to treat debts to foreigners with the same seriousness they take debts to Icelanders.
Comrade Kevin
@J. Michael Neal: Thanks, I was wondering what you meant.
ornery curmudgeon
@J. Michael Neal:
You speak nicely and tap-dance around the crappile well, but you have a very hard time acknowledging massive banking fraud. Weird.
MBunge
One thing to keep in mind is that while Iceland is what used to be called a 1st world country, its economy is really tiny. Equatorial Guinea, Albania, Jamaica, Senegal, Zambia and Nepal all have bigger GDPs than Iceland. If you look at what Iceland’s doing as a minor scam like a three card monty game on the sidewalk, doing the same thing in Ireland would be like a string of armed bank robberies and the US doing it would be like Goldfinger nuking Fort Knox.
Mike