Sunday, October 12, 2008

Iceland is Broke and I don’t Feel So Good Myself

If you think you are going broke and you watched your retirement vaporize before your eyes last week, be glad you live in the United States and not in Iceland.

Iceland has borrowed 10 times the value of its Gross Domestic Product, its banks have collapsed into insolvency, its currency is in tatters (thus, it can no longer print its way out of debt) and one of its chief creditors, the United Kingdom, has invoked War powers to seize all overseas Icelandic assets within the UK’s reach.

All in all, it was a bad week for Iceland.

Since this is a real estate blog, why Iceland?

The mainstream media has demonized US real estate as the engine of the world collapse. While it certainly contributed to the collapse, US real estate is not and was not the only cause of the collapse.

The US housing bubble injected some of the cash that pumped up the world credit bubble, but not all.

Consider the home grown mortgage problems in Iceland – they seem very similar to ours. Thus, their own housing mess – not the United States housing market – contribute, in large part, to Iceland’s fall.

But the days when the economy seemed capable of gravity-defying feats are gone. So are the days when investors went on an international buying spree, adding some of the biggest names of the British and American retailing industries to their portfolios? Gone too, are the days when ordinary citizens effortlessly joined in the fun, taking out second mortgages to finance their own trips abroad or at least to the Laugavegur, the main shopping strip in Reykjavik. "It's difficult; the landscape is very difficult," said Franch Michelsen, a watch dealer in central Reykjavik, as he took a break Wednesday from cleaning his shop window. Some ordinary Icelanders face a similar problem to the one that brought down the banks. In recent months, many mortgages were taken out in foreign currencies - marketed by the banks as a way to benefit from lower interest rates abroad, as rates in Iceland rose into the double digits. Now, with the Icelandic krona plunging, homeowners suddenly have to pay back far more expensive euro or dollar values of their mortgages. At the same time, house prices are falling. Iceland is all but officially bankrupt, International Herald Tribune, Eric Pfanner, October 9, 2008.

This collapse looks on a global level so much like the US Savings & Loan collapse of 1989 – 1991, it is scary. You would think we would learn, but perhaps not. We deregulated the S&L’s; they moved into questionable loans. 15 years later, we deregulated banks (partially), investment houses and insurance companies. They plunged headlong into questionable loans and questionable exotic debt instruments. Drexel, Burham & Lambert crashed in 1990; it was the poster child of bad investment banking and newly minted junk bonds. Today, not only Lehman Brothers, but every similarly situated Investment bank crashed on Wall Street or begged to be merged into a regulated commercial bank. (Say it ain't so.)

A quick review of Iceland’s troubles shows the troubles are based on deregulation and massive overuse of credit. Sound familiar. Consider that Iceland has borrowed $120 billion of debt when their entire GNP is only $20 billion. By comparison, we (the US) would have to have borrowed $137,800 billion of debt, given that our GNP is $13,780 billion.

To put that into comparison, we have injected somewhere in the range of 1 to 1.4 Trillion dollars in the last month or so to attempt to stanch the credit bleeding. That is 700bn committed by Congress with 350bn presently allocated. An additional 630bn was recently injected by the Federal Reserve (which may actually be supported by new Treasury Bill sales); and, about we also saw 500bn of various injections from the Fed, the Treasury and the Administration.

The Treasury’s first injection of “rescue” capital into the world economy is limited to 250bn. One half of that entire amount would be required to stanch the bleeding in Iceland alone. That ignores the bleeding in the UK, France, Spain, Italy (fully bankrupt in their own right, yet again), Germany, Austria, Sweden, Norway, Denmark, India, Egypt, Indonesia, … and the list goes on.

In an address on Thursday, Prime Minister Haarde warned his countrymen of "the inevitable cut in living standards" that the country is facing. One of the most immediate results of the frozen credit market has been the ongoing devaluation of the krona. The currency has lost 30 percent of its value against the dollar in the last 30 days and inflation has soared to 14 percent. Iceland's currency lost 10 percent against the euro last week alone. In short, with the country's economy dominated by the banking sector, Reykjavik has little choice but to find a way to shore up Iceland's financial system. But even as the country's banks are too big to let fail, they might be too big to save should global credit markets not loosen up rapidly. Iceland's Financial Woes Could Push It Closer to EU, Der Spiegel, Oct 4, 2008.

If you had $100,000 in the bank in Iceland, (with or without bank insurance), its only worth $70,000 right now and its still in freefall. Look outside your window. Milk and Meat Prices are moving up at 15% per year – and that inflation rate is predicted to increase. Also, Iceland’s 401(k)s (It’s an analogy, ok) crashed at twice the rate yours did in the United States. They fell along with the world’s collapse, losing at least 50% in value across world markets AND the ones that were denominated in Icelandic krona, fell 30% in addition to the 50% loss of market value.

So, if you suffered a loss of your 401(k) from $100,000 to $50,000, Icelanders fell and additional 30% based on currency collapse. Thus, Krona denominated savings fell from $100,000 to $35,000.

We are going to feel a lot of pain as we wean the US off a fat laden diet of debt. However, our diet will feel nothing like some of countries of Europe and that of Iceland.

One thing that is clear. US real estate is not the scapegoat of the world. An objective view of world financial data shows that the US housing mess is not the sole cause of the world credit meltdown.

Hugh Wood, Atlanta, Georgia.

& & & &

The US Economy is 700 times larger than Iceland’s. $13.78 trillion (2007 est.) is US GDP; Iceland’s is 20bn. CIA World FactBook. 2008. In the American system one billion is 1,000,000,000 and a trillion is 1,000,000,000,000 so one trillion is one thousand times one billion. We have 300M they have 300,000 in population. Iceland has 1% of the population of the US.


Hugh Wood said...

Published: October 18, 2008
The New York Times

Who knew? Who knew that Iceland was just a hedge fund with glaciers? Who knew?
If you're looking for a single example of how the globalization of finance helped get us into this mess and how it will help get us out, you need look no further than British newspapers last week and their front-page articles about the number of British citizens, municipalities and universities - including Cambridge - that are in a tizzy today because they had savings parked in Icelandic banks, through online banking services like
As Dave Barry would say, I'm not makin' this up.
When I went to the Icesave Web site to see what it was all about, the headline read: "Simple, transparent and consistently high-rate online savings accounts from Icesave." But then, underneath in blue letters, I found the following note appended: "We are not currently processing any deposits or any withdrawal requests through our Icesave Internet accounts. We apologize for any inconvenience this may cause our customers."
Any "inconvenience?" When you can't withdraw savings from an online bank in Iceland, that is more than an inconvenience! That's a reason for total panic.
So what's the story? Around 2002, Iceland began to free its banks from state ownership. According to The Wall Street Journal, the three banks that make up almost the entire banking system in Iceland "grew quickly on easy credit" and "their combined assets rose tenfold in five years." The Icelandic banks, while not invested in U.S. subprime mortgages, had gone on their own borrowing and lending binges, wooing savers from across Europe with 5.45 percent interest savings accounts.
In a flat world, money can easily seek out the highest returns, and when word got around about Iceland, deposits poured in from Britain - some $1.8 billion. Unfortunately, though, when global credit markets closed up, and the krona fell, "the Icelandic banks were unable to finance their debts, many of which were denominated in foreign currencies," The Times reported. When depositors rushed to get their money out, the Icelandic banking system had too little reserves to cover withdrawals, so all three banks melted down and were nationalized.
It turns out that more than 120 British municipal governments, as well as universities, hospitals and charities had deposits stranded in blocked Icelandic bank accounts. Cambridge alone had about $20 million, while 15 British police forces - from towns like Kent, Surrey, Sussex and Lancashire - had roughly $170 million frozen in Iceland, The Telegraph reported. Even the bobbies were banking in Iceland!
So think about it: Some mortgage broker in Los Angeles gives subprime "liar loans" to people who have no credit ratings so they can buy homes in Southern California. Those flimsy mortgages get globalized through the global banking system and, when they go sour, they eventually prompt banks to stop lending, fearful that every other bank's assets are toxic, too. The credit crunch hits Iceland, which went on its own binge. Meanwhile, the police department of Northumbria, England, had invested some of its extra cash in Iceland, and, now that those accounts are frozen, it may have to reduce street patrols this weekend.
And therein lies the central truth of globalization today: We're all connected and nobody is in charge.
Globalization giveth - it was this democratization of finance that helped to power the global growth that lifted so many in India, China and Brazil out of poverty in recent decades. Globalization now taketh away - it was this democratization of finance that enabled the U.S. to infect the rest of the world with its toxic mortgages. And now, we have to hope, that globalization will saveth.
The real and sustained bailout from the crisis will happen when the strong companies buy the weak ones - on a global basis. It's starting. Last week, Credit Suisse declined a Swiss government bailout and instead raised fresh capital from Qatar, the Olayan family of Saudi Arabia and Israel's Koor Industries. Japan's Mitsubishi bank bought a stake in Morgan Stanley, possibly rescuing it from bankruptcy and preventing an even steeper decline in the Dow. And Spain's Banco Santander, which was spared from the worst of this credit crisis by Spain's conservative banking regulations, is purchasing America's Sovereign Bankcorp.
I suspect we will soon see the same happening in industry. And, once the smoke clears, I suspect we will find ourselves living in a world of globalization on steroids - a world in which key global economies are more intimately tied together than ever before.
It will be a world in which America will not be able to scratch its ear, let alone roll over in bed, without thinking about the impact on other countries and economies. And it will be a world in which multilateral diplomacy and regulation will no longer be a choice. It will be a reality and a necessity. We are all partners now.

Hugh Wood said...

The Bad News Keeps Coming for Iceland. From The Scotsman. com

A near-riot and parliament besieged: Iceland boiling mad at credit crunch

« Previous « PreviousNext » Next »View GalleryPublished Date: 24 November 2008
By Omar Valdimarsson
THOUSANDS of Icelanders have demonstrated in Reykjavik to demand the resignation of Prime Minister Geir Haarde and Central Bank governor David Oddsson, for failing to stop the country's financial meltdown.
It was the latest in a series of protests in the capital since October's banking collapse crippled the island's economy. At least five people were injured and Hordur Torfason, a well-known singer in Iceland and the main organiser of the protests, would continue until the government stepped down.

As crowds gathered in the drizzle before the Althing, the Icelandic parliament, on Saturday, Mr Torfason said: "They don't have our trust and they are no longer legitimate."

The value of the Icelandic krona has been cut in half since January.

Four Nordic countries, as well as the International Monetary Fund (IMF), have pledged to lend the country a combined $4.6 billion to help revive its deflated economy. The loan would be the first by the IMF to a Western nation since 1976.

One young man climbed on to the balcony of the Althing building, where the president appears upon inauguration and on Iceland's national day, and hung a banner reading: "Iceland for Sale: $2,100,000,000" – the amount of the loan the country is getting from the IMF.

A separate group of 200-300 people gathered in front of the city's main police station, throwing eggs and demanding the release of a young protester being held there.

Police in riot gear used pepper spray to drive back an attempt to free the protester during which several windows at the police station were shattered. The pro-tester was later released after his fine was paid.

As daylight began to wane, demonstrators drifted away into the nearby coffee shops. Here, as currency tumbles, the price of a cup of coffee has shot up by about one-third since before the crisis struck.

The demonstrators accuse the government – elected last year – of not doing enough to regulate the banking industry and have called for early elections.

Iceland's next election is not required until 2011.

Opposition parties tabled a no-confidence motion in the government on Friday over its handling of the crisis, but the motion carries little chance of toppling the ruling coalition which has a solid parliamentary majority.

Gudrun Jonsdottir, a 36-year-old office worker, said: "I've just had enough of this whole thing. I don't trust the government, I don't trust the banks, I don't trust the political parties, and I don't trust the IMF.

"We had a good country and they ruined it."


ICELAND'S three biggest banks – Kaupthing, Landsbanki and Glitnir – collapsed under the weight of billions of dollars of debts accumulated in an aggressive overseas expansion, shattering the country's currency. Iceland's government seized control of all three institutions in early October.

This week, the North Atlantic island nation, which has a population of only 320,000, secured a package of more than US$10 billion (about £6.7 billion) in loans from the International Monetary Fund (IMF) and several European countries to help it rebuild its shattered financial system.

Despite the intervention, however, Iceland still faces a sharp economic slowdown and surging job losses while at least one-third of Icelanders are also at risk of losing their homes and life savings.

Geir Haarde, the Icelandic prime minister, has promised that the government will use the IMF money to bring back a flexible interest rate scheme and rewrite financial laws, particularly legislation relating to insolvency.

Iceland was the first country to ask the IMF for help as the turmoil in the credit markets in October hit home.

The UK government used anti-terrorism legislation to freeze money deposited by UK savers in Icelandic banks in order to ensure that their money was protected.