Iceland cuts interest rates and cuts deals

mike65

Iceland may have had its arse hanging out in a damned chilly breeze but the freedom is now swinging back in their favour.

http://www.bloomberg.com/news/2010-12-08/iceland-cuts-key-interest-rate-by-to-4-5-percent.html

http://www.ft.com/cms/s/0/d7e615b2-0227-11e0-aa40-00144feabdc0.html#axzz17em5OsDk

http://www.ft.com/cms/s/0/092dc360-03d4-11e0-8c3f-00144feabdc0.html#axzz17elEkYfT

The main concession to Iceland involved lower interest rates of 3.3 per cent on the UK debt and 3 per cent on the smaller Dutch debt, compared with 5.55 per cent in the previous agreement. There are also safeguards to ensure that repayments never exceed 5 per cent of Icelandic government revenues.

What % of Irelands revenue will be sucked up by the IMF/EU deal?

Zynks

It sounds like a very good deal. We could do with their negotiators as advisors to our crowd.

One thing I am curious about also is that the deal is for 3.9 bn. Is that the full amount of the losses?

I also note that it is the governments that are being repaid, but seems to be related to deposits. I wonder what happened to the bond holders - were these just deposit banks?

Scofflaw

Zynks wrote: »

It sounds like a very good deal. We could do with their negotiators as advisors to our crowd.

One thing I am curious about also is that the deal is for 3.9 bn. Is that the full amount of the losses?

I also note that it is the governments that are being repaid, but seems to be related to deposits. I wonder what happened to the bond holders.

Iceland only transferred the deposits of Icelandic citizens to the 'good banks', which meant that the deposits of UK and Dutch savers in Icesave had to be covered by the UK and Dutch governments under their versions of the Deposit Guarantee Scheme.

As to the bondholders, they were relegated behind depositors in a piece of emergency legislation, and will be suing to have that legislation reversed - something that would, in turn, impact the deals reached with the UK and Holland.

cordially,
Scofflaw

ashleey

What's the difference between Ireland and Iceland?

One letter and about 3%

In other words the country that defaulted is borrowing at a lower rate. No doubt we will be flooded with responses arguing the toss but it still seems that Iceland followed a better strategy in the longer term.

whatstherush

ashleey wrote: »

What's the difference between Ireland and Iceland?

One letter and about 3%

In other words the country that defaulted is borrowing at a lower rate. No doubt we will be flooded with responses arguing the toss but it still seems that Iceland followed a better strategy in the longer term.

Oh things are Rosey and Jim in Iceland alright.
Source
NASDAQ’s recent economic indicators paint a very grim picture of things to come:

- Actual inflation has risen by 41%from January 2007 through September 2010

- Disposable incomes have dropped by over 20% last year

- Wages have fallen by over 10% from 2007 to August 2010

- 63% of Iceland’s mortgages are on the brink of bankruptcy

- 40% of homeowners are already ‘technically’ insolvent

Scofflaw

ashleey wrote: »

What's the difference between Ireland and Iceland?

One letter and about 3%

In other words the country that defaulted is borrowing at a lower rate. No doubt we will be flooded with responses arguing the toss but it still seems that Iceland followed a better strategy in the longer term.

Iceland isn't borrowing that money to fund a hole in its banks or government spending, though. It had already 'borrowed' it, and an earlier deal in respect of paying it back was already rejected at referendum.

It's also worth pointing out that they're a couple of years into their IMF intervention and rebalancing program. We'll see where we are in December 2012.

cordially,
Scofflaw

ashleey

whatstherush wrote: »

Oh things are Rosey and Jim in Iceland alright.
Source
NASDAQ’s recent economic indicators paint a very grim picture of things to come:

- Actual inflation has risen by 41%from January 2007 through September 2010

- Disposable incomes have dropped by over 20% last year

- Wages have fallen by over 10% from 2007 to August 2010

- 63% of Iceland’s mortgages are on the brink of bankruptcy

- 40% of homeowners are already ‘technically’ insolvent

Could you look up the equivalent figures for Ireland?

All the above would apply here apart form the price index. Here prices are falling which offsets some of the fall in disposable income but increases the real value of your mortgage. Nice.

whatstherush

ashleey wrote: »

Could you look up the equivalent figures for Ireland?

All the above would apply here apart form the price index. Here prices are falling which offsets some of the fall in disposable income but increases the real value of your mortgage. Nice.

Well its 1 in ten irish mortgages in trouble here, so no there not the same.
http://www.irishtimes.com/newspaper/breaking/2010/1117/breaking39.html

SkepticOne

The main difference between Ireland and Iceland (besides the one letter), as far as I can see, is that Iceland is taking the pain quickly; we are dragging it out. Whereas they are at the bottom and climbing out, we are only just beginning our descent.

The reason for this is that we've adopted a "kick the can down the road" approach which, although it increases the overall amount of pain, spreads that pain out over a long period. Politically this is a much easier option.

In a way the Icelanders were lucky in that it was obvious to them that their banks were too big to save. We though we could save ours but we were wrong, but ended up destroying our financial sovereignty.

flutered

ashleey wrote: »

What's the difference between Ireland and Iceland?

iceland said their toxic loans went to the bottom of the pile, we said the toxic loans went to the top of the pile.

Scarab80

ashleey wrote: »

Could you look up the equivalent figures for Ireland?

All the above would apply here apart form the price index. Here prices are falling which offsets some of the fall in disposable income but increases the real value of your mortgage. Nice.

- Actual inflation has risen by 41%from January 2007 through September 2010 (1.8% Jan 07 to Nov 10)

- Disposable incomes have dropped by over 20% last year (2.3% from 2008 to 2009)

- Wages have fallen by over 10% from 2007 to August 2010 (3% from Q1 2008 to Q3 2010)

- 63% of Iceland’s mortgages are on the brink of bankruptcy (5.1% in arrears over 90 days)

- 40% of homeowners are already ‘technically’ insolvent (13% of Homeowners predicted to be in negative equity by end 2010, 30% of mortgaged households)

ashleey

Thanks for that. It makes for a proper comparison.

Given that the banking systems of both countries imploded at the same time but each took an alternative course of action it will make for a decent economic comparison. These figures could be monitored each year and finally we can get some objective analysis of the relative merits of debt restructuring. Admittedly it is slightly tricky as devaluation isn't an option here.

Back in the day I had to do an analysis of the different economic policies of Thailand and Taiwan after a similar call to the IMF in the late 80s.

Euroland

ashleey wrote: »

What's the difference between Ireland and Iceland?

One letter and about 3%

In other words the country that defaulted is borrowing at a lower rate. No doubt we will be flooded with responses arguing the toss but it still seems that Iceland followed a better strategy in the longer term.

And we should follow them.

Euroland

Scarab80 wrote: »

- Actual inflation has risen by 41%from January 2007 through September 2010 (1.8% Jan 07 to Nov 10)

- Disposable incomes have dropped by over 20% last year (2.3% from 2008 to 2009)

- Wages have fallen by over 10% from 2007 to August 2010 (3% from Q1 2008 to Q3 2010)

- 63% of Iceland’s mortgages are on the brink of bankruptcy (5.1% in arrears over 90 days)

- 40% of homeowners are already ‘technically’ insolvent (13% of Homeowners predicted to be in negative equity by end 2010, 30% of mortgaged households)

But this is just the beginning for Ireland whereas Iceland is already near its finish. So, in 5-10 years time we would see who suffered the most. And I have no doubt that it would be Ireland.

Scofflaw

Euroland wrote: »

But this is just the beginning for Ireland whereas Iceland is already near its finish. So, in 5-10 years time we would see who suffered the most. And I have no doubt that it would be Ireland.

I don't doubt that's how we'll feel. Still, I'm not sure what "near its finish" really means there, given the above stats.

cordially,
Scofflaw

zig

I presume he's implying thats the trough of the wave.

njals_saga

I'm not sure you can use inflation, drop in living standards and mortgages in default to properly compare the Irish and Icelandic economies.

The saviour and curse of the Icelandic economy is its currency. The krona has dropped hugely in value against the euro etc. which has greatly helped the recovery. This has helped exports and tourism etc. Unemployment is under 8% v almost 14% in Ireland. If Iceland had the euro its unemployment would no doubt be at a similiar level to Ireland.

The reason the krona is a curse is that for the last few decades in Iceland all loans have been indexed against the CPI. What that means is that when the CPI rises the principle of all loans increase. So as well as interest rates, loanees have to worry about the mortgage principle rising. As the krona is and has been so volatile, this custom was introduced to ensure that the banks received back the true value of what they had lent. They had to. I know of people whose student loans in the 70's effectively disappeared prior to this rule.

So the level of people in arrears is related to the inflation that has soared since the collapse. This also gives the government very little leeway in increasing taxes. Any increase in vat etc. led to an increase in mortgage payments.

So if Iceland had the euro this would not have happened, but equally if they they had the euro there would be much higher unemployment.

Since the collapse loans are now indexed to the wage index.

Rebelheart

Could, and should, Ireland have followed Iceland's path out of recession?


Iceland let its banks fail (and devalued its currency) and is now out of recession, according to yesterday's Irish Times. For allowing its banks to fail you all might remember that the British and Dutch went ballistic with the former using anti-terrorist legislation in 2008 to freeze Icelandic assets in Britain.

Basically, Iceland told the banks, bondholders et al to pay their own way and they collapsed. Iceland received condemnation from the countries in question. Iceland persisted. It is now out of recession.

The government of Ireland, in sharp contrast, allowed the financial interests of German, British and French financial institutions to be placed above the interests of the Irish people by assuming Irish taxpayer responsibility for the private losses of those foreign investors and banks. Cowardice and treason.


Iceland, with a population of some 318,000 people, has clearly a leadership more courageous than has Ireland. It also has a politically active population which mobilised and successfully insisted that a referendum be held to stop the Icelandic government from supporting those banks.

In 2008 Irish people, including a now very embarrassing Irish Times editorial, were patting themselves on the back saying "At least we're not as bad as Iceland". Once again, the Irish were deluding themselves about reality and fundamentally misguided in their response to it.

Could, and should, Ireland have followed Iceland's example and let the banks and bondholders burn?

Scarab80

njals_saga wrote: »

I'm not sure you can use inflation, drop in living standards and mortgages in default to properly compare the Irish and Icelandic economies.

The saviour and curse of the Icelandic economy is its currency. The krona has dropped hugely in value against the euro etc. which has greatly helped the recovery. This has helped exports and tourism etc. Unemployment is under 8% v almost 14% in Ireland. If Iceland had the euro its unemployment would no doubt be at a similiar level to Ireland.

The reason the krona is a curse is that for the last few decades in Iceland all loans have been indexed against the CPI. What that means is that when the CPI rises the principle of all loans increase. So as well as interest rates, loanees have to worry about the mortgage principle rising. As the krona is and has been so volatile, this custom was introduced to ensure that the banks received back the true value of what they had lent. They had to. I know of people whose student loans in the 70's effectively disappeared prior to this rule.

So the level of people in arrears is related to the inflation that has soared since the collapse. This also gives the government very little leeway in increasing taxes. Any increase in vat etc. led to an increase in mortgage payments.

So if Iceland had the euro this would not have happened, but equally if they they had the euro there would be much higher unemployment.

Since the collapse loans are now indexed to the wage index.

I think the difference in employment levels is more closely related to disfunction in the irish economy pre-crash rather than the benefits from having ones own currency. While having your own currency obviously helps generate exports the main fall in employment in Ireland has been in the construction sector, recession or no recession, punt or euro the amount of people employed in this sector was completely unsustainable.

From Iceland Statistics changes in employment levels from 2007 to 2009

Legislators and managers (1.20%) Professionals (11.90%) Associate professionals (3.51%) Clerks (-22.50%) Service and sales workers (-10.93%) Agricultural and fishery workers (-8.33%) Craft and related trades workers (-10.33%) Plant and machine operators (-15.15%) Elementary occupations (-25.53%)
Overall (-5.47%)

From CSO QNHS for the same period

Agriculture, forestry and fishing (-19.14%) Industry (-18.66%) Construction (-49.51%) Wholesale and retail trade; repair of motor vehicles and motorcycles (-9.09%) Transportation and storage (0.68%) Accommodation and food service activities (-6.95%) Information and communication (11.22%) Financial, insurance and real estate activities (4.49%) Professional, scientific and technical activities (-4.24%) Administrative and support service activities (-14.15%) Public administration and defence; compulsory social security (4.71%) Education (3.31%) Human health and social work activities (10.43%) Other NACE activities (2.72%)
Overall (-10.26%)

If we remove Craft and related workers and Construction from both sets of figures the reduction in Icelandic employment in the period is 4.80% and the reduction in Irish employment 4.47%!

The moral of the story is that having 13% of your entire labour force employed in building houses is retarded!

Max Power1

Its an interesting comparision.

However due to several constraining factors (Single currency membership, large amounts of UK and German money invested, lack of any meaningful indigenous industry) I dont think that defaulting was ever on the table for ireland, unfortunately.

Count Dooku

Max Power1 wrote: »

Its an interesting comparision.

However due to several constraining factors (Single currency membership, large amounts of UK and German money invested, lack of any meaningful indigenous industry) I dont think that defaulting was ever on the table for ireland, unfortunately.

Trade unions never will allow that private sector will earn more then public workers

Unemployment in Iceland in August measured 7.3 percent, according to new figures from the Directorate of Labour. That means that 12,096 people were unemployed and seeking work.

Unemployment went down by 3.8 percent between July and August and, proportionately, the reduction was greatest in the South and Southwest of Iceland. The Directorate of Labour received just two notifications of group redundancies in August, with the loss of 45 jobs.

Meanwhile, the pay gap between public sector and private sector workers has grown.

Similar positions in the private sector now pay an average of 18 percent more than public workers get for the same level positions. Last year the gap was 15 percent. These figures are the conclusion of a joint report from a prominent private sector labour union and its counterpart in the public sector.

Private wages have increased by an average of 4.5 percent, while their public sector counterparts are only on 1.5 percent higher wages than last year.

Iceland unemployment down again but public-private wage gap widens | IceNews - Daily News