The article did raise several points about which I was previously unaware; I will pursue them through other sources. I'm unsurprised that the IMF pushed back against the plan to default on the loans. The IMF usually props up failing economies and forces legislation that lets foreign investors reduce or withdraw their local investments. Love it or hate it (and I incline towards the latter), putting your balls in the vice like that is standard operating practice for them--it's what they do. I was surprised to learn (and until it is confirmed elsewhere, I remain skeptical) that the UK and Holland threatened to freeze the funds of all Icelander-held bank accounts.
http://news.bbc.co.uk/1/hi/uk_politics/7688560.stm
At least we're not fighting about fish this time.
Here's some indication that all the assets in the UK of Landsbanki, were seized under terror laws.
> The British government threatened to freeze Icelander savings and checking accounts.
Unless I'm totally daft, this is saying the British government was threatening to freeze UK-based bank accounts of individual Icelanders. Chalk up another factual inaccuracy. I'm not well versed in this stuff, so it's a really bad sign when I can stumble over errors and inaccuracies in damn near every other paragraph.
For example, compare:
http://en.wikipedia.org/wiki/Accession_of_Iceland_to_the_Eur...
and
http://en.wikipedia.org/wiki/Accession_of_Turkey_to_the_Euro...
Personally, I would love to see Turkey in the EU but they have got a lot more work to do than somewhere like Iceland.
Keep in mind that the debt here means that depositors gave them money in the usual bank arrangement. When you deposit money with your bank, they don't let the money sit in a physical vault or the digital equivalent. They put as much of it as possible to work. The Icelandic banks had used the money to make diversified investments across Europe. I'm from Denmark, and in this period there were several noteworthy Icelandic investments in major Danish companies, and that was the pattern all over northern Europe. It was a far more responsible and effective investment strategy than what was generally followed by the Irish banks, who injected the bulk of their investment funds back into the Irish economy, especially in the real estate market, thereby artificially inflating and extending the Irish bubble.
> I realize it's not easy to see the forest from the trees, but isn't there some point at which banks start to see that they are taking on too much debt?
They could have hedged against overall market drops much better than they did. They put too much into real estate. Etc. But when there is a rapid and systematic dive in confidence and all your major depositors make a simultaneous run on the bank, you are pretty much screwed. They'd have needed to bet a sizable chunk of their funds against the market as a whole to cover that eventuality. But if everyone had done that, things would quickly have gone nonlinear, so it's unclear at least to me what they should have done, given their mandate to invest the money on hand.
The root mistake was probably taking on too many easy-come, easy-go customers who'd want to make a quick escape in the event of a down-turn.
http://depts.washington.edu/teclass/articles472/Wall%20Stree...
Money quote:
"His job, he say s, was to sell people, mainly his fellow fishermen, on what he took to be a can’t-miss speculation: borrow yen at 3 percent, use them to buy Icelandic kronur, and then invest those kronur at 16 percent. "I think it is easier to take someone in the fishing industry and teach him about currency trading," he says, "than to take someone from the banking industry and teach them how to fish.""
(article is much more thorough and balanced than that, don't get me wrong - it's just that these few paragraphs about this guy drive home who really was driving the bubble in 2008).
The lack of fact-based critical thinking is precisely what causes things like the 2008 financial crisis. If an argument is riddled with factual errors I cannot give any faith in its conclusion even if I am generally supportive of them.
Your politician's college was a long time ago, he as a man would have had time to change. The article's mistakes are right now; there's little reason to believe the sloppy fact checking improves right between the first paragraph and the second.
http://www.timesonline.co.uk/tol/news/politics/article491012...
-- Iceland is not an EU member. Iceland is a part of EFTA (European Free Trade Association) and Schengen (border control) but not a full member. An application to join the European Union has been filed by the Icelandic government but it is generally considered to be a first step in negotiations as opposed to being a commitment to join.
-- Iceland did not go bankrupt. At no time did the Icelandic government default. Support from the IMF (International Monetary Fund) and the other Scandinavian nations along with cutbacks in government spending and tax raises prevented that. The Icelandic National Bank did at one point go "technically" bankrupt but was bailed out by the government.
-- The currency in Iceland is the krona (ISK) not the Euro.
-- The Icesave accounts where created by Landsbankinn to increase deposits and liquidity and to reduce reliance on long term financing, they were not designed to "attract foreign investors". The interest rate was about 9% and they were mostly popular with individuals and local councils looking for short term interest on on-hand cash.
-- The correct names of the Icelandic banks where Landsbanki, Kaupthing and Glitnir. They are now named Landsbanki, Arion bank and Islandsbanki respectively.
-- While I agree that there was protest I think that using the word "riot" is overkill. I think that what stands out is that a group of young activists were arrested for trying to enter the parliament against the orders of the police and that windows in the parliament building were broken by stone throwing. A couple of thousand people gather outside the parliament building for a few days to make noise and listen to speeches.
-- The public voted against the Icesave deal because the there were unresolved legal issues around it. The EU/EFTA legislation states that each member state must set up a deposit-insurance fund to cover losses caused to depositors in case of bank bankruptcy. The legislation does not mandate that the government insure the deposits, only that the deposit-insurance fund is correctly set up. The Icelandic government did set up the fund in accordance with the legislation and therefore there was doubt as to whether or not the Icelandic government was legally liable for the Icesave deposits to begin with. The problem was that if Iceland's interpretation of the law would be confirmed the whole banking system in Europe would have been at risk, since it would have meant that there was no effective security in place for depositors. Therefore there was tremendous pressure on both sides to resolve the matter without going to the EFTA court. The Icelandic people felt that the legal ambiguity on the legality of holding the Icelandic government responsible meant that if any repayment was to be done it should be shouldered by both parties. The deal the British and Dutch authorities pushed was in no way fair, with the interest rate being significantly higher than the long term rates of the ECB (European Central Bank).
-- The consensus in Iceland was and is that the Icesave debt should be repaid (if only for moral reasons) - but only on fair terms and according to EU legislation.
-- The statement "they decided to draft a new constitution that would free the country from the exaggerated power of international finance and virtual money" is total fabrication. Re-working the constitution has been on the agenda in Iceland for the last 10 years with various committees putting forth suggestions. The only difference is that after the awakening that followed the crash it was decided to have a national referendum to allow people to vote a special Constitutional Council. The council actually did it's work in a very transparent manner, using Facebook and other social media to publish drafts and gather feedback. The newly created constitution is currently waiting for parliamentary updates and approval (see http://stjornlagarad.is/english/).
-- There is a misconception that the people of Iceland rose up and refused to bail out the banks. The Icelandic government has spent billions of dollars to save the financial system resulting in higher taxes and cuts in public service. The big difference is that instead of using the bailouts to save existing companies the government created new legal entities that took over the obligations and assets of the bankrupt entities, essentially splitting the banks up into two (bankrupt old company and a new company in major ownership by the government and creditors). That way the old banks will go through bankruptcy proceedings (with creditors loosing the most) and the new banks (that received the bailouts) will be partly or majorly owned by the government, which can at a later point sell it's ownership to recoup some of the bailouts.
The consensus in Iceland was and is that the Icesave debt should be repaid (if only for moral reasons) - but only on fair terms and according to EU legislation.
What currencies are these debts denominated in? Is there a plan to convert them to ISK, if they are not already denominated in that currency?
The reason I am asking is that Modern Monetary Theory tells us that it is very unwise for a government to take foreign-currency denominated debts. It creates the danger that, should exports drop for some reason, the nation's exports are no longer sufficient to offset the flow of payments servicing the debt, which can cause severe depreciation of the currency causing inflation.
In fact, most of the horror stories of failed economies and hyperinflation involve foreign-currency denominated debt, usually together with some other factor. This includes the turn-of-the-century crisis in Argentina, and the Weimar Germany and Zimbabwe hyperinflations.
Just something to think about. Oh, and...
A couple of thousand people gather outside the parliament building for a few days to make noise and listen to speeches.
If you scale that up to e.g. the US, it would be like a couple of million people going to Washington. Nothing to sneeze at ;)
That said:
- if you default as a Country and don't pay back your debts who is going to trust you again? Greece needs foreign investment
- if they were forced out of the Euro, what kind of inflation and interest rates would they get in Greece?
- don't forget that Greece got a lot of money from the EU programmes for poorer countries. If they were kicked out they wouldn't get any more
There are many more reasons not to default, but I think these are more than enough.
If Greece defaulted and was kicked out of the Euro the new drachmas would be very devalued, but that would make Greek products very cheap to the rest of Europe and would increase exports. Euro monetary policy is designed for the German economy and is too tight for Greece. By the way, it's also too tight for Italy, Spain and Portugal's economy.
The only way Greece can recover is to grow their economy, the austerity measures and the tight Euro are hindering not helping their growth.
And in the case of Banks that invested in Greek bonds, don't forget that the accounting was falsified exactly to get low interest rates which albeit higher than the German ones were VERY much lower than what they would have been without the Euro, to the benefit of all the Greeks. I'm sorry for those who are getting the direst consequences, but I don't see the Greeks having any moral high ground in this situation, not even against the evil German banks who lent them money.
The larger picture is that this is the biggest crises the euro has faced and it might not survive, especially since the nationalistic politics make it so hard to have a coordinated response. The leaders seem to think that the austerity measures throughout all of Europe will allow them to muddle through, but that looks to me like a decade of hardship and slow growth which will bring political instability and even riots as seen in England. I think the only hope would be the creation of a euro bond which would allow borrowing to be backed by the full faith and credit of the Euro Zone as a whole, but that would mean tighter political integration between the countries which seems to be the opposite of what people want at this point.
I absolutely agree about EU monetary policy, though. Its incredible that the EU central bank is raising interest rates right now.
- The equivalent in euros of wage cuts / taxation that we see now in greece
- Going out of the eurozone doesnt mean secession from the EU
In practice a default will have similar effects as the austerity packages, compressed in time (~4 years instead of 10+ which the current austerity packages propose). In fact, a devalued currency might stimulate internal growth as imports will become unaffordable.
EDIT: Defaulting and then doing even more austerity isn't a horrible solution and might be better than their current zombie status, but they aren't refusing to do that because they're stupid or sellouts.
Not saying it's right or wrong, just that it seems like the reasoning to me.
A British million is the same thing as an American million: it is the words "billion", "trillion", etc, that mean different things in British English than in American English.
But that just makes your point more true, namely, the OP probably meant billion.
Arguably Collapse is just as much about societies that avoid collapse as it is about those that did disappear.
It's a very interesting subject -- at what point does the population itself disavow huge problems created by faulty systems they got stuck in? But the author doesn't add much light to the subject, only a lot of heat.
http://webcache.googleusercontent.com/search?q=cache:O6Fa0N2...