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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.
Posted by Tyler Cowen on October 30, 2008 at 05:55 AM in Current Affairs | Permalink
Comments
It's pretty easy to imagine the loands being forgiven or repudiated.
Posted by: David Rotor at Oct 30, 2008 6:14:28 AM
It looks like this (IMHO): join the EU, get development subsidies, and have many debts forgiven when politically expedient.
Posted by: Barry Kelly at Oct 30, 2008 6:15:11 AM
Yet when African countries, who often find themselves in this exact situation, ask for this, it's suddenly impossible...
Posted by: momama at Oct 30, 2008 6:24:56 AM
I don't see this as a problem.
This only means that Iceland cannot possibly pay off the loan in one year.
They will have to pay it off over many years.
National bankruptcy would be a problem if the debt was greater than total Icelandic wealth. GDP is the flow of income and output generated by that wealth. Presumably, the wealth is a multiple GDP.
I was in debt by more than my income. I would have said that my income grew by less than the interest rate too. I wasn't insolvent because my home was worth more than my debt. And, of course, my consumption was less than my income allowing me to actually pay off my debt a little over the years.
Presumably, this new loan to Iceland is supposed to be used to pay off other loans. And perhaps other loans that aren't being paid off add up to many times GDP. Perhaps Icelandic national insolvency is inevitable. But a loan equal to GDP and interest rate equal to GDP growth doesn't imply this at all.
Posted by: Bill Woolsey at Oct 30, 2008 6:55:33 AM
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.
Posted by: nyongesa at Oct 30, 2008 7:08:06 AM
isn't public debt of Japan and Italy in the 100% of GDP range?
Posted by: lzl at Oct 30, 2008 7:29:44 AM
lzl, I think foreign debt of those countries is much lower, so the government debt is hold by their own countrymen.
Posted by: zamfir at Oct 30, 2008 7:46:20 AM
Loan to own
Posted by: D. F. Linton at Oct 30, 2008 7:58:49 AM
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
liquidation.
Posted by: Valuethinker at Oct 30, 2008 8:41:33 AM
I'm imagining an endgame of massive migration of Icelanders to the EU and US, followed by lots of commenters here complaining about how they're ruining the country.
i am curious tho why hawaii can't do geothermal, as they have the volcanoes.
Posted by: DK at Oct 30, 2008 9:08:04 AM
DK
'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.
Posted by: valuethinker at Oct 30, 2008 9:23:26 AM
It seems to me that the problem isn't the loan size or annual interest payments, but the fact that Iceland's gdp growth has come from an industry that has or will disappear.
Posted by: Thomas at Oct 30, 2008 9:23:35 AM
I would imagine that foreign men with even a little money will now have much better access to Scandinavian beauties.
Posted by: Dennis at Oct 30, 2008 9:25:28 AM
Yet when African countries, who often find themselves in this exact situation, ask for this, it's suddenly impossible...
Except, its not the same thing. Every situation is different.
Iceland has a developed economy, no tribal conflict, and at least until
now political stability-much of which is endemic to Africa.
I've seen thousands of solicitations for charities in Africa, yet to
see one for the poor Icelanic people.
Occam's Razor applies here-not the "everything is about race" that is
being popularized in "Churches" and "universities" and
Posted by: Nobama at Oct 30, 2008 10:01:13 AM
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.
Posted by: Gabe at Oct 30, 2008 10:02:18 AM
Gabe, are you talking about Iceland or the US?
Posted by: Superheater at Oct 30, 2008 10:20:12 AM
One obvious possibility: Iceland used to be a dependency of Denmark. There's no reason it couldn't be again.
Posted by: David Hecht at Oct 30, 2008 10:22:57 AM
Speaking as a Norwegian, I have certainly heard solicitations for aid to Iceland, and in fact our government is one of the lenders to their government. I approve of this. I would like to turn your argument on its head, however. Several African (and Central Asian and South American) countries have been ruled by dictators or authoritarian regimes since their colonial days, and yet when they make the transition to a more (but of course not perfect) democratic system, the loans WE gave their dictators are not repudiated. Iceland, on the other hand, have had a stable, democratic rule since they gained their independence from Denmark in 1944. They have no-one to blame but themselves. Yet when it comes to being bailed out, their 300.000 inhabitants should be let off the hook while millions in poorer countries are refused a chance to get a good start at democracy? This makes no sense to me.
Posted by: momama at Oct 30, 2008 10:32:58 AM
Why not just default?
Posted by: Josh at Oct 30, 2008 10:40:34 AM
"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."
According to "The End of the Line", Iceland does a very good job of managing its stocks of cod, as opposed to Canada and northern European nations. That would seem to imply that the value of the harvest with constant yield would go up over time.
Posted by: Russell L. Carter at Oct 30, 2008 10:41:30 AM
Take the loan, use loan money to give grants to the civilians to flee.
Posted by: Niederriter at Oct 30, 2008 10:42:52 AM
Iceland will be ok; its highly educated people and cohesive society will allow it to move forward with relative rapidity into new sectors.
I would worry honestly more about Pakistan - it has only a few days left to survive, apparently unless the IMF bails it out. And if a bankrupt, unstable if not outright failed, water-short, terrorist-riddled state with nukes isn't a serious global risk, then I don't know what is.
Hungary has already tapped the EU/IMF money; of course the Ukraine; Baltic states may be next; Argentina has eaten its private pension funds; the Fed opened swap lines for Brazil, Mexico & South Korea, who may also need IMF help - seriously Tyler it's global crisis of sovereigns now. Don't mean to sound like Nouriel Roubini, sorry, but seriously. . .you've got to talk to your core audience about this please.
On the "Waaaay Too Big To Fail, Waaaay Too Big To Save" list now comes Deutsche Bank, which would have posted a loss if not for a quick accounting change today, apparently. Deutsche famously boasts it's worth more than the entire UK GDP, so this is very important.
Posted by: StreetWalker at Oct 30, 2008 10:44:50 AM
Tax collecting and Taser prods will be the new growth industries.
Posted by: Gabe at Oct 30, 2008 10:53:17 AM
Icelanders need to play to their strengths. Is there a (valuable, extensive) market for the unique genetic situation?
They could start charging Craig Venter et al for services rendered.
Posted by: meter at Oct 30, 2008 11:19:56 AM
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.
Posted by: Sven at Oct 30, 2008 11:29:42 AM
