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Why Ireland should look to Iceland for advice
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30-05-2013 10:29am#1Iceland should be the example looked upon by Ireland as to what a strong, independent, and wiser country does in a banking crisis.
You do not need to burden the people with the debt of what is after all a private company. Propping up (bailing out) such large scale failures is a waste of resources and would be much better spent on tackling debt.
So what happens if you let the banks fail? Take a look
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Ireland - EU
Iceland - Not in EU0 -
Thread advocating pouring petrol on the economy and flicking a lit match onto it so distressed borrowers at least get the satisfaction that everybody is in the **** with them #4327982740
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I'm sorry. Once I saw Fox News I couldn't watch anymore.0
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This is the same Icelandic President who presided over Iceland when its economy collapsed, isn't it?
A collapse which has seen the Kronor virtually half in value against other currencies thus meaning an effective 50% cut in the income of all Icelanders (in non-Kronor terms). And which despite the OP's belief, Icelandic economists claim resulted in the second most expensive bank bailout in the OECD (because Iceland only let some of its banks collapse, it still had to bailout others to ensure it had a banking system).
Hands up anyone who'd volunteer to have their income halved (or that of their family)? After all, all we need is a simple act of the Oireachtas to impose that, nothing particularly fancy to prevent us doing so except perhaps we don't want to do so...0 -
Did they not have to create new banks that cost 30% of GDP to capitalise?0
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This is the same Icelandic President who presided over Iceland when its economy collapsed, isn't it?
A collapse which has seen the Kronor virtually half in value against other currencies thus meaning an effective 50% cut in the income of all Icelanders (in non-Kronor terms). And which despite the OP's belief, Icelandic economists claim resulted in the second most expensive bank bailout in the OECD (because Iceland only let some of its banks collapse, it still had to bailout others to ensure it had a banking system).
Hands up anyone who'd volunteer to have their income halved (or that of their family)? After all, all we need is a simple act of the Oireachtas to impose that, nothing particularly fancy to prevent us doing so except perhaps we don't want to do so...
Not the Presidents fault, Prime Minister Geir Haarde On 8 April 2009, Geir stated that he was solely responsible for accepting controversial donations to the Icelandic Independence Party in 2006, ISK 30 millions from the investment group FL Group, and ISK 25 millions from Icelandic bank Landsbanki.
They put hundreds of criminal charges against the banksters after the bubble burst.
I wanted to add
"Many commentators blame reckless bank lending as the key cause behind the 2008–2012 financial crises in Ireland and Iceland. Our analysis, however, suggests that it was not the banks as such that caused the crisis but rather the boom-bust policies of the central banks of Ireland and Iceland. It is these institutions that set in motion the false economic boom and the consequent economic bust. While Iceland allowed its banks to go bankrupt, the Irish government chose to bail out its banks. So, in this sense, the Icelandic authorities did the right thing, and Iceland has consequently outperformed Ireland economically. We hold that despite this positive step, Iceland's authorities have introduced various welfare schemes that have curtailed the benefits of having let banks go belly up. Furthermore, both Ireland and Iceland have resumed aggressive money pumping, thereby setting in motion the menace of boom-bust cycles."
Please see this piece:
http://www.mises.org/daily/6279/
I think the poor management crisis by the EU has hampered Irish Recovery.
Iceland has shown a decent recovery BUT that has been painful medicine. You should take into account the volcanic eruptions.
It needs to keep a nimble & quick approach in now alleviating it's credit controls that are now becoming a hindrance whilst managing the risk of capital flight from it's country. 2011 did see a 30% increase in investment in Ireland so there are chances of a long term recovery.
The Icelandic experience confirms that the IMF is correct to be stressing the importance of speedily resolving Irish banks’ non-performing loans. Small- and medium-sized firms will not prosper with negative equity. There is only pain and no gain in postponing necessary write downs of household debt.
http://www.youtube.com/watch?v=rNGL-gkC-OA&feature=youtube_gdata_player
Iceland's remedy is not perfect but it worked.0 -
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Ireland would never ask iceland for advice as we as a country (take it up the backside) and guaranteed the assets and liabilities of EU banking stability of europes top banks.0
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Ireland would never ask iceland for advice as we as a country (take it up the backside) and guaranteed the assets and liabilities of EU banking stability of europes top banks.
Yes hopefully EU submission works out in the longterm. And who says the 1916 spirit is dead?
Ireland is now in a position where it can only look to the Eurocrats to sort out the mess. Unlike Iceland it doesn't have any room to manoeuvre it's given up all it's red lines and in any case it certainly wouldn't do anything like those dangerous Icelandic Viking Rebels did and hold Democratic Referendums on such issues. That would be way too rogue state ;-)
In an ideal world Ireland would stay in the EU but re-instate the punt and peg it to the pound. The complex mess of sorting out budgets in a confederation of nation states under one currency, I believe, is always going to be doomed.
Cutting Government Spending, attacking debt and Lowering taxes on successful businesses that produce wealth creates a stronger nation.
I envisage another artificial bubble being created and another banking collapse. The dangerous part now being - unlike Iceland - the banks know that if the ponzi bet sinks the public will pick up the debt.
It will be interesting to see if the government seeks to do anything to diversify the economy or further encourage business growth. Ireland needs in my humble opinion to look more closely at the California Hydrogen Fuel Cell Development (it's already being rolled out by Shell) and would solve a great number of problems for a country with increasing issues on fossil fuel supply whilst at the same time having a fair share of gas supplies and gas infrastructure. Ireland would also benefit in the short term by adopting the South African Sasol Gas to Liquid production system.
Another area to keep an eye on is the research of the Germans in creating synthetic natural gas see article:
http://www.brighthub.com/environment/renewable-energy/articles/78303.aspx
The great breakthroughs in Irish Nanotechnology now needs to be taken from pure science to a creation from entrepreneurs into consumer goods which can be put into the export markets. The fields for this are endless.0 -
Moderators, Science, Health & Environment Moderators, Society & Culture Moderators Posts: 3,372 Mod ✭✭✭✭
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1) Ireland is in the Euro, Iceland isn't. This meant that the Icelandic central bank could always print enough Kroner to ensure that it's banks didn't run out of money, even in the event that they become insolvent. Ireland wouldn't have been able to do this.
2) The creditors the Icelandic banks were mostly foreigners, and so the Icelandic government could just let those investors take the loss, without it affecting the Icelandic economy. This wasn't the case in Ireland; a lot of Irish people would have been creditors of the Irish banks, and any default would've harmed the Irish economy as those investors lost their money.
3) The Irish financial system was just small enough to be rescuable. The icelandic banking system was just way too big for it to be even remotely savable.0 -
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Andrew, you're listing difficulties. Ireland has managed to jump and clear every legal, moral and intellectual hurdle in pursuit of the wrong strategy so difficulties are hardly a barrier. Its hardly beyond reason that they could have been as effective in pursuit of a proper strategy.0
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3) The Irish financial system was just small enough to be rescuable. The icelandic banking system was just way too big for it to be even remotely savable.
But has the system been rescued?
Ireland has a household debt of 190%
The exposure from the oversupply of property by developers is a problem as they make a large (25%) part of the loan portfolio of Irish financial institutions. Not to mention the land speculation.
Net government debt as % of GDP is at 102.324
Has there been any open government enquiry into banking failure? What lessons have been learned? When if ever will the bail out loans be paid €85?0 -
Iceland should be the example looked upon by Ireland as to what a strong, independent, and wiser country does in a banking crisis.
You do not need to burden the people with the debt of what is after all a private company. Propping up (bailing out) such large scale failures is a waste of resources and would be much better spent on tackling debt.
So what happens if you let the banks fail? Take a look
Iceland has their own currency and can print money (quantitative easing), Ireland cannot. They cant be compared.0 -
Moderators, Science, Health & Environment Moderators, Society & Culture Moderators Posts: 3,372 Mod ✭✭✭✭ Join Date:Posts: 3262
Andrew, you're listing difficulties. Ireland has managed to jump and clear every legal, moral and intellectual hurdle in pursuit of the wrong strategy so difficulties are hardly a barrier. Its hardly beyond reason that they could have been as effective in pursuit of a proper strategy.
I'd argue that these are fundamental difficulties that prevented Ireland from doing anything close to what Iceland did. You can't just suppose that we could've overcome these 'difficulties' had we tried; if that was the case then what was the incentive not to try?But has the system been rescued?
Ireland has a household debt of 190%
I guess it remains to be seen whether Ireland's system was indeed small enough to rescue. But it's unambiguous that Iceland's was too big.0 -
I'd argue that these are fundamental difficulties that prevented Ireland from doing anything close to what Iceland did. You can't just suppose that we could've overcome these 'difficulties' had we tried; if that was the case then what was the incentive not to try?
I guess it remains to be seen whether Ireland's system was indeed small enough to rescue. But it's unambiguous that Iceland's was too big.
Iceland could deflate its currency value to keep export prices appealing.
Ireland is still an expensive country for tourists and for importers, two spots in which Ireland can make money if they could devalue their currency.0 -
clairefontaine wrote: »....if they could devalue their currency.
But......they can't.
Plain and simple.0 -
So obviously no one bothered to read any of the links I posted, so I'll just take a few bits from a blog by an Icelanic economist, and PhD in Economic Instability.
http://icelandicecon.blogspot.ie/2013/01/the-economic-truth-on-iceland.html
Re Letting the banks fail
The Icelandic economic collapse in October 2008 was inevitable. No country has ever managed to build up its banking sector up to 10 times the worth of the gross domestic product and lived to tell the tail unharmed. When Kaupthing, the biggest Icelandic bank, went bankrupt it was the fourth biggest corporate bankruptcy in the world’s history! Glitnir’s bankruptcy was number 6 on the list, dwarfing Enron’s which occupied the no. 9 place. Landsbanki’s failure was just cut short of the top 10, ending in no. 11.
It is very important to realise one thing: the governments, both the “conservative” one prior, during and after the October crash, and the “left wing” one, which took over after the 2009 general elections, did everything they could – absolutely everything – to try and keep the banks afloat.
...the first lore on Iceland – that it intentionally let the banks to bankrupt – is not according to reality. The reality is that the government tried to save them but could not.
Re Debt relief
What the households got from the government was “The 110% Measure” (if your mortgage was higher than 110% of the property’s market value, you would get the principal marked down to the 110% mark) and “The Abstract Debt Relief” which you were only applicable to enter if you were in “serious” debt difficulties.
The total household debt cancelled due to those government-initiated measures: 49.8 billion ISK. To make any sense out of that figure: the debt of Icelandic households just before the economic collapse in October 2008 amounted to more than 1,450 billion ISK...........
..........So in total, the Icelandic households have been given a debt jubilee of 196.3 billion ISK. That’s around 13% of the pre-crisis stock of debt they had, mostly coming from the fight against the illegal foreign-currency loans.
However, despite this cancellation of 13% of the total debt, the stock of households’ debt has grown again. And why is that? It’s not predominately because households have gone back on the spending spree they admittedly were on before the crash. It is because of the indexation of the principal of mortgages in Iceland: if inflation in Iceland is 5% the amount you owe the bank increases by 5% before you pay it back!
And since the inflation in Iceland since October 2008 is 25%, one can understand why the debt of households in Iceland is not falling in accordance to what one might think0 -
And PLEASE dont ever trust Fox as a credible news source.0
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We should look to all our neighbours, not just Iceland and the UK. Germany and France pay their public sectors less than the private sector averages with no ostensible ill effects on efficiency and delivery of government services.Job security in both countries is considered an attractive feature of public sector employment,although high costs of redundancies make it very hard to sack private sector workers.In contrast,even after austerity cuts Ireland pays the public sector (civil service,teachers,gardai,HSE and hospitals) about 50% more than the private sector average but delivers far fewer free services,notably in health care.If this pay is unjustifiably high,obviously that takes from money that should be available for services.
In Finance's budget forecast,2013 pay was estimated at €19 billion,which is 15% of estimated gross national income of €131 billion. If this pay was cut to roughly the same level as the private sector's,the figure would be €12.7 billion,a cut of €6.3 billion in arguably unnecessary pay. The pay bill is 15% of national income and the arguably unnecessary portion is 5%. That €6.3 billion would go a long way to reducing the national deficit.0 -
Dear Ireland,
Let me issue and control a nation’s money and I care not who writes the laws
With Thanks
ECB
I think Vincent Browne is definitely the last Irish Rebel.
What's the interest on that ball on chain debt (bailout) that's been taken on?
Do you think it will be life or a 20 year stretch before it's all paid off?
;-)0 -
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maryishere wrote: »We should look to all our neighbours, not just Iceland and the UK. Germany and France pay their public sectors less than the private sector averages with no ostensible ill effects on efficiency and delivery of government services.Job security in both countries is considered an attractive feature of public sector employment,although high costs of redundancies make it very hard to sack private sector workers.In contrast,even after austerity cuts Ireland pays the public sector (civil service,teachers,gardai,HSE and hospitals) about 50% more than the private sector average but delivers far fewer free services,notably in health care.If this pay is unjustifiably high,obviously that takes from money that should be available for services.
In Finance's budget forecast,2013 pay was estimated at €19 billion,which is 15% of estimated gross national income of €131 billion. If this pay was cut to roughly the same level as the private sector's,the figure would be €12.7 billion,a cut of €6.3 billion in arguably unnecessary pay. The pay bill is 15% of national income and the arguably unnecessary portion is 5%. That €6.3 billion would go a long way to reducing the national deficit.
France is in no better shape than Britain economically, just has better food and women which makes it seem that way.
Germany has a good system, Sweden is also a good example for how a nation deals with a banking crisis. It's come on leaps and bounds from it's blip in the 90's. The lesson from Sweden being Responsible Economic Governance.0 -
This seems more to be an explanation of why Iceland could not have emulated Ireland rather than why Ireland could not have emulated Iceland (which is the point I think you're trying to make).3.) The Irish financial system was just small enough to be rescuable. The icelandic banking system was just way too big for it to be even remotely savable.0 -
true, but the point is Germany and France pay their public sectors less than the private sector averages with no ostensible ill effects on efficiency and delivery of government services. Here our expenditure on public sector wages is off the richter scale, by comparison. That €6.3 billion we could save would go a long way to reducing the national deficit.France is in no better shape than Britain economically0 -
Crucially Iceland tackled the corruption and punished the poor performance of certain banks
It is not poised to allow another bloated out of control banking sector to flourish again
Ireland has not tackled the core of the crisis in it's banking community.
Has the Government looked at the messy CDO's , the stupid financial derivative mathematical models created for how securities ought to trade, or the total lack of sound regulation and have honest risk assessments for both investors and borrowers been looked at?0 -
More rubbish.Crucially Iceland tackled the corruption and punished the poor performance of certain banks
It is not poised to allow another bloated out of control banking sector to flourish again
Please read this.
http://studiotendra.com/2012/12/29/what-is-actually-going-on-in-iceland/0 -
Has the Government looked at the messy CDO's , the stupid financial derivative mathematical models created for how securities ought to trade, or the total lack of sound regulation and have honest risk assessments for both investors and borrowers been looked at?
I'm sure the government has "looked" at them. But CDO and credit default swaps and all those other financial instruments are internationally traded, so our impact would be limited.
Besides the fact that they have very little to do with our situation, and the also the fact that comparing our situation to Iceland is nonsensical.
We had a good old fashioned housing bust.
Iceland basically turned itself into a giant hedge fund.0 -
It wasn't just an old fashioned bubble but systematic of a failed whole financial system. Not to mention poor oversight from the IMF
" In the lead up to the crisis the IMF was blind to the developing crises. It even praised nations like Ireland during the run up to the crisis, missing the largest bubble (relative to GDP) of any nation, an epidemic of banking control fraud, and the destruction of any pretense to effective Irish banking regulation.
The crisis revealed that the ECB’s narrow mission and function left the EU helpless to deal with a severe economic crisis. The ECB could not save Europe. Only the Fed could, and did, save Europe through currency swaps, serving as a lender of last resort (often on the basis of chimerical collateral) to major European banks, and providing liquidity backstops to myriad financial markets."
William K Black0 -
Infact this guys whole article is worth reading.
"Fianna Fail, Ireland’s ruling party during the initial crises is only vaguely left-wing, but it won the prize for the worst response to a banking crisis in modern Europe. It remains so clueless that last I checked its website it still boasted:
The measures we have taken have been commended by international bodies such as the European Central Bank, the European Commission, the IMF and the OECD and the approval of the international markets.
The old, and very true, line is that there is always at least one fool in a poker game and if you cannot identify the fool within five minutes of joining the game it’s because you are the fool. Ireland has played the fool in its response to the banking and sovereign debt crises. Fianna Fail, gratuitously, turned a banking crisis into a budgetary and sovereign debt crisis and a severe recession into a economic trap that threatens to make Ireland a mini-Japan. Fianna Fail – even after it performed disastrously and was crushed in the general election – thinks it’s a good thing that the ECB and the IMF “commended” Fianna Fail’s policies. Fianna Fail would think it was a good thing if its poker rivals “commended” how well it played poker. Unfortunately, the Irish people provided Fianna Fail’s stakes in this real-world poker game with the Irish banks’ creditors, the ECB, and the IMF. Fianna Fail still thinks the ECB is Ireland’s friend. “Naïve” is inadequate as a descriptor."
http://www.michaelmoore.com/words/mike-friends-blog/bad-cop-crazed-cop0 -
Thread advocating pouring petrol on the economy and flicking a lit match onto it so distressed borrowers at least get the satisfaction that everybody is in the **** with them #432798274
No that's already happened now your trying to put out a fire by drowning the flames in gasoline.
“IRISH banks would be all but wiped out if the Government was to default or restructure the State’s borrowings because of their vast holdings of Irish bonds and sovereign debt."
Bank of Ireland and Allied Irish Bank could face loses of as much as €11.4bn if a major haircut was part of any deal, according to a new report from Goldman Sachs, which has been obtained by the Sunday Independent.”
The only thing that these figures on Irish bond holdings demonstrate (which Goldman misses entirely) is what I have been explaining. The Irish government gratuitously bailed out massively insolvent Irish banks. The direct beneficiaries of this bailout included many foreign creditors, particularly banks, and more particularly German banks. The Irish government, because it lacks a sovereign currency and because it has guaranteed these massive debts, is short of euros. The Irish government, therefore, gave the banks Irish bonds. The Irish banks already had some Irish bonds in portfolio. Irish bonds have large market losses because Ireland is insolvent and if it follows the ECB’s austerity dictates it will become more insolvent. (Eurozone bank stress tests excluded sovereign debt risks because they were designed not to be very stressful.)"
http://www.michaelmoore.com/words/mike-friends-blog/bad-cop-crazed-cop0 -
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Kaia Helpless Millipede wrote: »Iceland has their own currency and can print money (quantitative easing), Ireland cannot. They cant be compared.
You're getting over printed ECB money
Or quantative easing if you like, a shoddy system indeed.0 -
However, in Iceland's case, the mere existence of a central bank helped prevent a run. The population, knowing that the central bank was ready to restock the ATMs if necessary, did not feel the need to withdraw all their money. Though a few did withdraw money,. there was never a danger of a full scale run on the banks.You're getting over printed ECB money
Or quantative easing if you like, a shoddy system indeed.0 -
OP, I really think you should do a little more research on not only Iceland's crash but also Ireland's.
Some of your posts appear to be factually incorrect and/or vague to the point of being meaningless.0 -
However, in Iceland's case, the mere existence of a central bank helped prevent a run. The population, knowing that the central bank was ready to restock the ATMs if necessary, did not feel the need to withdraw all their money. Though a few did withdraw money,. there was never a danger of a full scale run on the banks.
The immediate imposition of capital controls, together with the fact that the entire Icelandic banking system was nationalised overnight, leaving nowhere for the money to go, may have played a small part.
cordially,
Scofflaw0 -
Hmmm. Well you can implement capital controls to prevent money leaving the country that would not necessarily prevent a bank run where people are worried that the ATMs will run dry and they won't have enough for groceries though it might alleviate the situation a bit. Really you need a central bank standing by to provide liquidity if necessary as far as I can see. You can stop or hinder money leaving the country but capital controls won't stop queues at the ATMs with people looking to hoard cash.The immediate imposition of capital controls, together with the fact that the entire Icelandic banking system was nationalised overnight, leaving nowhere for the money to go, may have played a small part.
cordially,
Scofflaw
I'm not an economist but here's an extract of an article from two Icelandic ones.Immediately following the crisis, the foreign part of the payment system collapsed, and the exchange rate fell by around 25%. Funds held by carry traders amounted to over 40% of GDP, and it was feared that the bulk of those investors, along with some domestic agents, would seek to leave the Icelandic currency, exaggerating the fall in the exchange rate.
Under these circumstances, the government had three choices.- Let the currency markets determine the exchange rate and face the consequences;
- manage exchange rates by imposing special taxes on speculative capital movements; or
- impose capital controls.
The Icelandic authorities seem to have been in favour of the second choice but reportedly the IMF, arguing in terms of equal treatment of all foreign currency transactions, demanded strict capital controls. So, at the IMF’s insistence, all-encompassing capital controls applying both to inflows and outflows of currency were introduced.
Note that these economists see capital controls of the sort imposed on Iceland as unnessary:Thus, in our view, the imposition of capital controls was both unnecessary and unjustified. Without them, the exchange rate might have temporarily fallen even further in a worst case scenario, in which case a surgical intervention in the form of a temporary tax on short capital outflows would have been a sufficient policy response.0 -
Hmmm. Well you can implement capital controls to prevent money leaving the country that would not necessarily prevent a bank run where people are worried that the ATMs will run dry and they won't have enough for groceries though it might alleviate the situation a bit. Really you need a central bank standing by to provide liquidity if necessary as far as I can see. You can stop or hinder money leaving the country but capital controls won't stop queues at the ATMs with people looking to hoard cash.
I'm not an economist but here's an extract of an article from two Icelandic ones.
Note that these economists see capital controls of the sort imposed on Iceland as unnessary:
I'd agree to some extent, although the existence of a Central Bank in the UK hasn't prevented retail customer bank runs such as Northern Rock - and of course the existence of the Central Bank of Iceland seems not to have quelled the fears of UK-based Icesave depositors. The contrasting case of the eurozone hasn't really seen such retail-deposit bank runs (except Cyprus), which suggests that the "daily cash" level hasn't been the primary level of concern in the banking crisis either in the eurozone or, despite a couple of incidences in the UK, elsewhere either.
Where we have seen runs is in corporate and large deposits, and in general they have moved out of any country whose banking system shows signs of instability - something Iceland's capital controls do prevent.
cordially,
Scofflaw0 -
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Where we have seen runs is in corporate and large deposits, and in general they have moved out of any country whose banking system shows signs of instability - something Iceland's capital controls do prevent.
This is very relevant, given that Iceland's population is about 250,000.
Even if everyone withdrew as much in cash deposits as they could, it would have paled in comparison to the amounts that would have left the country in capital flight.0 -
Which makes sense until you remember that they wiped out foreign bond holders and depositors (or at least put them on the long finger). These groups were unable to get their money out anyway. The only threat was a domestic bank run but with the Icelandic central bank standing by this was not going to happen.This is very relevant, given that Iceland's population is about 250,000.
Even if everyone withdrew as much in cash deposits as they could, it would have paled in comparison to the amounts that would have left the country in capital flight.
This is why I'm inclined to agree with the economists I posted earlier. The primary purpose was to retain strength in the currency. But as they point out, there may have been better ways to do this.0 -
See answer given to vinylbomb.I'd agree to some extent, although the existence of a Central Bank in the UK hasn't prevented retail customer bank runs such as Northern Rock - and of course the existence of the Central Bank of Iceland seems not to have quelled the fears of UK-based Icesave depositors. The contrasting case of the eurozone hasn't really seen such retail-deposit bank runs (except Cyprus), which suggests that the "daily cash" level hasn't been the primary level of concern in the banking crisis either in the eurozone or, despite a couple of incidences in the UK, elsewhere either.
Where we have seen runs is in corporate and large deposits, and in general they have moved out of any country whose banking system shows signs of instability - something Iceland's capital controls do prevent.
cordially,
Scofflaw0 -
Which makes sense until you remember that they wiped out foreign bond holders and depositors (or at least put them on the long finger). These groups were unable to get their money out anyway. The only threat was a domestic bank run but with the Icelandic central bank standing by this was not going to happen.
This is why I'm inclined to agree with the economists I posted earlier. The primary purpose was to retain strength in the currency. But as they point out, there may have been better ways to do this.
There's a few billion in foreign money still in Iceland, trapped by the capital controls:The restrictions are blocking as much as $8 billion in offshore krona holdings being divested, forcing them into other assets categories and making Sedlabanki “very concerned” of a bubble in the equity market, Sigridur Benediktsdottir, head of financial stability at the Reykjavik-based bank, said in an interview this month.
and others are less sanguine in their views on the likelihood of banks runs once capital controls are lifted:The central bank has been reluctant to speed up the process to not risk the krona. It has held dual currency auctions to ease the country out of the restrictions, even as it also started support purchases of kronur in February. The bank now also refused to grant Landsbanki an exemption to the controls to pay 200 billion kronur to the governments of the U.K. and the Netherlands, Morgunbladid reported on May 11, without saying how it obtained the information.
“When the capital controls are abolished, the pension funds should be among the first ones to get out,” said Vidarsson. “The pension funds would never take a run with all their investments out of the country. Individuals, however, might take all their savings out of the economy as soon as they get the chance.”
http://www.bloomberg.com/news/2013-05-13/swelling-iceland-cash-raises-capital-control-risks-tm-ceo-says.html
In essence, Iceland seems to be stewing in a sealed capital bubble, and we're not going to know how things go in confidence terms until the capital controls are lifted.
cordially,
Scofflaw0 -
Basically you're pointing out the problems arising from maintaining capital controls too long. You get an unhealthy build up of capital in the country and difficulty then lifting the restrictions.There's a few billion in foreign money still in Iceland, trapped by the capital controls:
and others are less sanguine in their views on the likelihood of banks runs once capital controls are lifted:
http://www.bloomberg.com/news/2013-05-13/swelling-iceland-cash-raises-capital-control-risks-tm-ceo-says.html
In essence, Iceland seems to be stewing in a sealed capital bubble, and we're not going to know how things go in confidence terms until the capital controls are lifted.
cordially,
Scofflaw
The economists I quoted earlier argued that capital controls were causing more damage than good and I agree with them.
I think my initial point stands: that after wiping out foreign depositors and bond holders in failed banks, the main problem then becomes the danger of a domestic bank run and this is adequately addressed by assuring the population that the central bank is ready if necessary to provide liquidity.0 -
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Basically you're pointing out the problems arising from maintaining capital controls too long. You get an unhealthy build up of capital in the country and difficulty then lifting the restrictions.
The economists I quoted earlier argued that capital controls were causing more damage than good and I agree with them.
I think my initial point stands: that after wiping out foreign depositors and bond holders in failed banks, the main problem then becomes the danger of a domestic bank run and this is adequately addressed by assuring the population that the central bank is ready if necessary to provide liquidity.
Well, no, I was pointing out that a good chunk of money trapped by the capital controls in the Icelandic banking system was money that would otherwise have fled. $8bn is not pocket change in the context of the Icelandic banking system.
On top of that, the capital controls also prevent individual depositors from fleeing the Icelandic banking system, and the article covers the point that there is likely to be pent-up demand there too.
In short, I don't think the absence of a cash run on the Icelandic banks can be taken as evidence of confidence in the backing of the Icelandic central bank when there's (a) little evidence of such cash runs elsewhere, and (b) evidence that in the absence of capital controls Icelandic banks would likely be suffering the same kind of non-cash "silent" bank runs that have been a feature of lack of confidence elsewhere.
cordially,
Scofflaw0 -
Again, your points relate to problems building up due to the presence of capital controls agreed with the IMF for the purposes of currency stabilisation in return for a bailout. This happened some time after the initial setting up of new banks and the wiping out (or turning into claims) of the bond holders and foreign depositors.Well, no, I was pointing out that a good chunk of money trapped by the capital controls in the Icelandic banking system was money that would otherwise have fled. $8bn is not pocket change in the context of the Icelandic banking system.
On top of that, the capital controls also prevent individual depositors from fleeing the Icelandic banking system, and the article covers the point that there is likely to be pent-up demand there too.
In short, I don't think the absence of a cash run on the Icelandic banks can be taken as evidence of confidence in the backing of the Icelandic central bank when there's (a) little evidence of such cash runs elsewhere, and (b) evidence that in the absence of capital controls Icelandic banks would likely be suffering the same kind of non-cash "silent" bank runs that have been a feature of lack of confidence elsewhere.
What your not addressing, with respect, is that at the peak of the crisis when the initial action was taken to set up the new banks, the holders of foreign deposits and bonds could not have caused a run because these funds no longer existed as bonds and deposits with the new banks.
What you need to provide, if you are trying to make the case that it was primarily capital controls that prevented a bank run is some document from the time (e.g. the IMF agreement) stating that this was their purpose. I think you will find however, that most of the commentary suggests different reasons for the imposition of controls, e.g. this from Friðrik Már Baldursson who, unlike the previous economists I quoted, supports capital controls, though not for reasons of preventing a bank run:It would have been highly risky not to impose capital controls. Firms’ debt was largely in foreign currency and households also had a significant amount of such debt. The remainder of lending was to a large extent indexed to the consumer price index which is highly sensitive to exchange-rate movements. As the carry-trade inflows which had supported the krona until the end of 2007 were first halted and then reversed, the exchange rate depreciated by 40% over the first three quarters of 2008. By October inflation was approaching 20% and inflation and exchange rate–linked debt shot up. Balance sheets of most firms and many households were already in tatters. But it was still crucially important to stabilise the exchange rate in order to prevent even more damage.0 -
Again, your points relate to problems building up due to the presence of capital controls agreed with the IMF for the purposes of currency stabilisation in return for a bailout. This happened some time after the initial setting up of new banks and the wiping out (or turning into claims) of the bond holders and foreign depositors.
What your not addressing, with respect, is that at the peak of the crisis when the initial action was taken to set up the new banks, the holders of foreign deposits and bonds could not have caused a run because these funds no longer existed as bonds and deposits with the new banks.
What you need to provide, if you are trying to make the case that it was primarily capital controls that prevented a bank run is some document from the time (e.g. the IMF agreement) stating that this was their purpose. I think you will find however, that most of the commentary suggests different reasons for the imposition of controls, e.g. this from Friðrik Már Baldursson who, unlike the previous economists I quoted, supports capital controls, though not for reasons of preventing a bank run:It would have been highly risky not to impose capital controls. Firms’ debt was largely in foreign currency and households also had a significant amount of such debt. The remainder of lending was to a large extent indexed to the consumer price index which is highly sensitive to exchange-rate movements. As the carry-trade inflows which had supported the krona until the end of 2007 were first halted and then reversed, the exchange rate depreciated by 40% over the first three quarters of 2008. By October inflation was approaching 20% and inflation and exchange rate–linked debt shot up. Balance sheets of most firms and many households were already in tatters. But it was still crucially important to stabilise the exchange rate in order to prevent even more damage.IMF Survey online: Iceland’s program with the IMF expired in August this year, ending three years of close cooperation. What do you regard as the main achievements of the program?
Kozack: The program had three objectives: to stabilize the exchange rate, put the public finances on a sustainable path, and restructure the financial system. All three of these objectives were met by the time the program expired. This was really an enormous achievement, given the severity and depth of the crisis that Iceland faced at the time.
The exchange rate had depreciated sharply in the run-up to the crisis, and there was a deep concern that it would plummet in a disorderly way. This is why capital controls were imposed.
http://www.imf.org/external/pubs/ft/survey/so/2011/surveyartf.htm
That is, to prevent money flooding out of Iceland, which would include a run on the Icelandic banking system.
Other such IMF comments:Banks are well capitalized, profitable, and liquid. Nevertheless, although progress has been made, significant legacy risks remain. In particular, banks remain reliant on locked-in deposits resulting from capital controls, nonperforming loan ratios have stabilized at still-high levels, and indexation imbalances have increased.Reducing vulnerabilities in the financial sector
12. Banks’ balance sheets have strengthened but risks still need to be addressed. The three largest banks are profitable and well-capitalized but nonperforming loan ratios are still high, though well below their post-crisis peak. Although progress has been made, legacy risks remain, including a reliance on deposits locked in by capital controls, asset-liability mismatches, and loan and deposit concentration.
http://www.imf.org/external/np/ms/2012/092812.htm
I don't know whether that amounts to stating that locking deposits into the Icelandic banking system was part of the purpose of the capital controls, but I haven't claimed that, only that the capital controls are preventing a run on the Icelandic banks because there's nowhere for them to run to, and have had that effect since they were imposed. That the likelihood of a sudden capital outflow on the lifting of capital controls is still a major concern at this stage suggests that confidence in the Central Bank of Iceland is not as high as you believe.
And, as I said, the trapped money isn't a new phenomenon - this is from 2009:Restrictions on foreign-currency inflows for new investment will be removed first. Provided that goes well, the central bank said, the next phase will be removing capital-outflow restrictions, an action that will unlock foreign capital trapped in Iceland since the crisis erupted.dlouth15 wrote:What your not addressing, with respect, is that at the peak of the crisis when the initial action was taken to set up the new banks, the holders of foreign deposits and bonds could not have caused a run because these funds no longer existed as bonds and deposits with the new banks.
I think that may be inaccurate. As far as I know, deposits in Iceland were guaranteed, and moved over to the new banks, while the branches and subsidiaries abroad were let fail without recourse. That means that the deposits that were wiped out were deposits in the UK and Holland, not in Iceland, whether the deposits in Iceland were those of foreign entities or not. The difference is between "foreign holders of deposits in Iceland" and "holders of foreign deposits" - the latter did disappear, but would not in any case have affected exchange rates, been subject to capital controls, or been backed by the Icelandic Central Bank, making them irrelevant to our argument, I think.
cordially,
Scofflaw0 -
I missed this point about Northern Rock earlier so I'll address it now.I'd agree to some extent, although the existence of a Central Bank in the UK hasn't prevented retail customer bank runs such as Northern Rock - and of course the existence of the Central Bank of Iceland seems not to have quelled the fears of UK-based Icesave depositors. The contrasting case of the eurozone hasn't really seen such retail-deposit bank runs (except Cyprus), which suggests that the "daily cash" level hasn't been the primary level of concern in the banking crisis either in the eurozone or, despite a couple of incidences in the UK, elsewhere either.
Where we have seen runs is in corporate and large deposits, and in general they have moved out of any country whose banking system shows signs of instability - something Iceland's capital controls do prevent.
Scofflaw
It's fairly easy to see why the existence of a central bank ready to print money would have reassured Icelanders and prevented a run. Sure, capital controls may still be necessary to prevent irrational currency devaluations and prevent capital flight from the general economy but the general acute problem of a run was solved by the existence of the central bank in the case of Iceland.
As Andrew puts it:1) Ireland is in the Euro, Iceland isn't. This meant that the Icelandic central bank could always print enough Kroner to ensure that it's banks didn't run out of money, even in the event that they become insolvent. Ireland wouldn't have been able to do this.
So why didn't the existence of the Bank of England prevent a run on Northern Rock?
I think what you've got to remember here is that the whole of Iceland's baking system failed, not merely one or two banks out of I don't know how many exist in Britain therefore the relationship between the Icelandic central bank and the new banks of Iceland was at that point entirely different to that of the Bank of England and a particular dodgy bank.
Northern Rock was not the entire banking system of Iceland and the Bank of England's remit is not to save each and every bank as it falls. Depositors in Northern Rock knew this, hence the run. The Icelanders, on the other hand, knew that the new banks could not possibly be allowed to fail and they also knew that their central bank has the capability to print enough to keep the new banks liquid.
I think this also addresses some of your other points about the purpose of capital controls. If you don't understand the normal relationship between a central bank and individual banks vs a central bank and the entire banking system then you are likely to place more emphasis on things like capital controls as a means of preventing bank runs.0 -
Getting back to the main point of the thread: can we learn anything from Iceland?
I think another point to be made is the distinction between the Icelandic government and Iceland as a whole. I don't think we can learn a whole lot from the Icelandic government. They didn't appear to see any of the problems coming and when they crisis hit they had no choice but to act along the lines they did. They were lucky that they weren't in the Euro at that point so the solution they eventually were forced into worked after a fashion. It was the actions of the President and the people of Iceland that prevented a lot of money leaving the country to pay Icesave depositors. The government of Iceland were fully prepared to pay this money.
The Irish government likewise did not see the problems coming. There was no central bank dedicated to Ireland so the sort of solution available to Iceland was not available to Ireland. But we were lucky that the banking problem was just small enough that the guarantee put in place allowed the banks to continue functioning and there was no immediate run (though it caused problems later as the economy deteriorated). The president has a different role in Ireland so the Irish people were never given the opportunity to hold back on payments to foreign bond holders in the Irish system.
I think in a way Iceland was lucky that their banking problem was so big that they had to do what they did. It would be much worse for them if their system was a bit smaller and they were tempted to rescue the whole thing, like Ireland. Despite problems remaining, I'm not sure they would have had the sort of recovery they have enjoyed if a rescue was just about possible.0 -
I missed this point about Northern Rock earlier so I'll address it now.
It's fairly easy to see why the existence of a central bank ready to print money would have reassured Icelanders and prevented a run. Sure, capital controls may still be necessary to prevent irrational currency devaluations and prevent capital flight from the general economy but the general acute problem of a run was solved by the existence of the central bank in the case of Iceland.
As Andrew puts it:
So why didn't the existence of the Bank of England prevent a run on Northern Rock?
I think what you've got to remember here is that the whole of Iceland's baking system failed, not merely one or two banks out of I don't know how many exist in Britain therefore the relationship between the Icelandic central bank and the new banks of Iceland was at that point entirely different to that of the Bank of England and a particular dodgy bank.
Northern Rock was not the entire banking system of Iceland and the Bank of England's remit is not to save each and every bank as it falls. Depositors in Northern Rock knew this, hence the run. The Icelanders, on the other hand, knew that the new banks could not possibly be allowed to fail and they also knew that their central bank has the capability to print enough to keep the new banks liquid.
I think this also addresses some of your other points about the purpose of capital controls. If you don't understand the normal relationship between a central bank and individual banks vs a central bank and the entire banking system then you are likely to place more emphasis on things like capital controls as a means of preventing bank runs.
Again, there are problems with this argument. First, no UK bank was allowed to fall - Northern Rock was nationalised and then sold - which means that the Bank of England and the Bank of Iceland did exactly the same in terms of saving banks.
Second, the entire Irish banking system failed, as did Iceland's, yet despite the absence of an Irish Central Bank with money-printing capabilities, there was no retail run on Irish banks as there was on Northern Rock.
So, looking at the argument that it was the existence of a money-printing Central Bank that prevented a run on the Icelandic banks, we find that:
(a) the presence of a money-printing Central Bank didn't prevent a retail bank run in a country with similar problems, and whose Central Bank acted similarly (UK);
and
(b) the absence of a money-printing Central Bank didn't lead to a retail bank run in a country with similar problems that lacked one (Ireland, or any eurozone country)
In fact, with the exception of Northern Rock, we've been spared retail bank runs despite the severity of the crisis. Seeking a special explanation for Icelandic banks not having one, then, seems redundant first off, and then requires a large degree of special pleading.
What we have seen is capital flight - that is, the flight of large deposits, particularly corporate ones - and that being what capital controls are intended to prevent, their role in preventing capital flight seems rather important. I don't think there's any comfort for foreign depositors in the idea of the Bank of Iceland printing currency - quite the contrary!
cordially,
Scofflaw0 -
But you leaving out important details here and you haven't addressed the point I made earlier. The Bank of England is not set up to provide infinite liquidity to badly run banks. Otherwise there would be little incentive for banks generally to run their operations wisely. Depositors in Northern Bank at this stage would have known this, that there was a possibility that the bank might fail and therefore were concerned for their money.Again, there are problems with this argument. First, no UK bank was allowed to fall - Northern Rock was nationalised and then sold - which means that the Bank of England and the Bank of Iceland did exactly the same in terms of saving banks.
Iceland's banks had already failed at the point at which we're discussing and the central banks role would have been to provide whatever liquidity was required to keep the ATMs running. There was no question of them under the circumstances cutting off liquidity.
I hope you can see the difference.
I think it is more accurate to say that it was on the verge of failure at the point at which the blanket guarantee came in.Second, the entire Irish banking system failed, as did Iceland's, yet despite the absence of an Irish Central Bank with money-printing capabilities, there was no retail run on Irish banks as there was on Northern Rock.
You are correct, though, that a run was prevented by the blanket guarantee. But this in itself has had the effect of making the Irish state pick up the tab for poor banking decisions.
And nor would it have under those circumstances which were very different from Iceland after the failure of their banking systems.So, looking at the argument that it was the existence of a money-printing Central Bank that prevented a run on the Icelandic banks, we find that:
(a) the presence of a money-printing Central Bank didn't prevent a retail bank run in a country with similar problems, and whose Central Bank acted similarly (UK);
But it would have done had it not been for the blanket guarantee. The option to let bad banks fail and set up new ones was not available to us. See Andrew's post earlier.
(b) the absence of a money-printing Central Bank didn't lead to a retail bank run in a country with similar problems that lacked one (Ireland, or any eurozone country)
I can see why you might think this until you take the other factors into consideration. The topic under discussion is whether or not we can learn from Iceland's experience. Unfortunately (or fortunately, depending on your perspective), the dramatic solution they eventually were forced into was not available to Ireland and we were forced to implement the blanket guarantee.In fact, with the exception of Northern Rock, we've been spared retail bank runs despite the severity of the crisis. Seeking a special explanation for Icelandic banks not having one, then, seems redundant first off, and then requires a large degree of special pleading.
I think currency controls may have had a role in preventing bank runs in Iceland. There is no way of knowing. Certainly the rationale for them very shortly after the peak of the crisis was not bank runs but rather stabilisation of the currency (there are reasons for wanting only limited depreciation, as businesses with inflation liked loans or loans linked to foreign currency might not be able to cope). There are also occasions where capital flight occurs damaging the economy but you don't get bank runs. Ireland has been through phases of this, for example. However you do have a point, if only a weak one.What we have seen is capital flight - that is, the flight of large deposits, particularly corporate ones - and that being what capital controls are intended to prevent, their role in preventing capital flight seems rather important. I don't think there's any comfort for foreign depositors in the idea of the Bank of Iceland printing currency - quite the contrary!0 -
But you leaving out important details here and you haven't addressed the point I made earlier. The Bank of England is not set up to provide infinite liquidity to badly run banks. Otherwise there would be little incentive for banks generally to run their operations wisely. Depositors in Northern Bank at this stage would have known this, that there was a possibility that the bank might fail and therefore were concerned for their money.
Iceland's banks had already failed at the point at which we're discussing and the central banks role would have been to provide whatever liquidity was required to keep the ATMs running. There was no question of them under the circumstances cutting off liquidity.
Which would mean that it's not the existence of a money-printing central bank per se that produces the comfort that prevents bank runs, but the public perception of central bank policy. The UK public perceived that the BoE might not hold Northern Rock up, and panicked - the Icelandic public perceived that the BoIc had no choice, and therefore didn't. Each bank has equal powers to print currency.
That is rather different from the original claim that one of the lessons to be learned from Iceland is the comforting role of the existence of a national central bank perceived to be willing to print its national currency as required. Insofar as central banks provide such comfort, it seems instead to be a question of their perceived willingness to stand over the banks, and is equally applicable to the ECB.
Instead, it seems that the correct claim is that what comforts people is the perception of a central bank for the currency willing to stand over the banks, which is hardly news.I hope you can see the difference.
I think it is more accurate to say that it was on the verge of failure at the point at which the blanket guarantee came in.
You are correct, though, that a run was prevented by the blanket guarantee. But this in itself has had the effect of making the Irish state pick up the tab for poor banking decisions.
That would be the same in the Icelandic case, though.And nor would it have under those circumstances which were very different from Iceland after the failure of their banking systems.
But it would have done had it not been for the blanket guarantee. The option to let bad banks fail and set up new ones was not available to us. See Andrew's post earlier.
Er, yes it was, just as Anglo has been split into good and bad parts. The State didn't do it, but it could have been done.I can see why you might think this until you take the other factors into consideration. The topic under discussion is whether or not we can learn from Iceland's experience. Unfortunately (or fortunately, depending on your perspective), the dramatic solution they eventually were forced into was not available to Ireland and we were forced to implement the blanket guarantee.
Well, no - they were forced, certainly, because their banks were something like 10 times their GDP as opposed to our 3.5 times. We had the choice they lacked, and, just as they would rather have done, we didn't opt for the immediate resolution of the banks. Instead, we were forced slowly into it as the solutions we had opted for crumbled under the weight of the banks' bad decisions.I think currency controls may have had a role in preventing bank runs in Iceland. There is no way of knowing. Certainly the rationale for them very shortly after the peak of the crisis was not bank runs but rather stabilisation of the currency (there are reasons for wanting only limited depreciation, as businesses with inflation liked loans or loans linked to foreign currency might not be able to cope). There are also occasions where capital flight occurs damaging the economy but you don't get bank runs. Ireland has been through phases of this, for example. However you do have a point, if only a weak one.
Stabilisation of the currency is exactly the same thing as preventing bank runs, though, because it's the capital flight from the currency abroad that destabilises the currency. Sure, it's broader, in the sense that it also prevents flight from krone denominated shares, but to a large extent, stopping money fleeing the country is stopping money fleeing the national banking system.
The point remains the same, which is that the capital controls have trapped a large amount of money (relative to the Icelandic economy) inside the Icelandic economy, and within their banking system. In the absence of those controls, that money would have fled abroad and left the Icelandic banking system, despite the supposed comfort offered by the CBoIc's power to print krone (indeed, such a power is very worrying for foreign money).
In short, I can't see that "have your own national currency and central bank" is a lesson that can be drawn from Iceland, at least in the way that you are trying to draw it. What counts is the perceived policy of the central bank, and the currency is irrelevant, although one could make the point that the ECB being willing to provide liquidity to the Irish banking system within the euro is less damaging than the CBoIre doing so within the punt, because the inflationary/currency exchange effects of the former are far smaller than those of the latter.
cordially,
Scofflaw0 -
Yes, if you like. I wasn't making a claim about central banks in general but a specific one about the central bank in Iceland at that particular time. But I already explained this in an earlier post.Which would mean that it's not the existence of a money-printing central bank per se that produces the comfort that prevents bank runs, but the public perception of central bank policy. The UK public perceived that the BoE might not hold Northern Rock up, and panicked - the Icelandic public perceived that the BoIc had no choice, and therefore didn't. Each bank has equal powers to print currency.
That is rather different from the original claim that one of the lessons to be learned from Iceland is the comforting role of the existence of a national central bank perceived to be willing to print its national currency as required. Insofar as central banks provide such comfort, it seems instead to be a question of their perceived willingness to stand over the banks, and is equally applicable to the ECB.
The existence of a central bank in Iceland at that time with a willingness to provide whatever liquidity was required was what enabled them to prevent a bank run before any capital controls were put in place.
Now you have it. From the context of the thread you will see that this is exactly what I meant. You gave the strong impression of not understanding that a central bank under such circumstances of Iceland at the time will provide whatever liquidity is necessary and therefore the people have no need to worry that the banks will run dry.Instead, it seems that the correct claim is that what comforts people is the perception of a central bank for the currency willing to stand over the banks, which is hardly news.
Whatever your understanding up until now I'm glad we agree that this is the case.
[On the issue of the banks being on the verge of failure in Ireland but not yet failed]That would be the same in the Icelandic case, though.
No, the banks actually failed in Iceland. They were not bailed out at that time. New banks were set up and Icelandic deposits moved to them as well as assets from the old banks. The entire banking system was recreated almost overnight.
It was at this stage that a run might have happened if Iceland did not have it's own central bank.
[On the issue of splitting the banks into two parts in Iceland]Er, yes it was, just as Anglo has been split into good and bad parts. The State didn't do it, but it could have been done.
Yes, but the State in the case of Ireland was on the hook for all the poor assets and debts of the bad bank. What Iceland did was let the bad part of it fail. Ireland could not have got away with this because we did not have a central bank to support the good bank unlike Iceland. The ECB, I think we can agree, would not have countenanced it at that time, especially under Trichet.
[On whether or not Ireland was forced into the blanket guarantee.]Well, no - they [Iceland] were forced, certainly, because their banks were something like 10 times their GDP as opposed to our 3.5 times. We had the choice they lacked, and, just as they would rather have done, we didn't opt for the immediate resolution of the banks. Instead, we were forced slowly into it as the solutions we had opted for crumbled under the weight of the banks' bad decisions.
My recollection of events is that next to no solutions were applied in Ireland until shortly before the blanket guarantee was put into place. By which time it was too late. Both countries are alike in that they did not see the problems coming and did not implement the proper solutions in good time.
Something like an Icelandic solution in Ireland would only have been possible, as I've said a number of times might have been possible (there would have been differences in Ireland's case) but only if Ireland had at that time, its own cenctral bank. It did not, so we got the blanket guarantee.
You are correct, however, in that the blanket guarantee would not have been available to Iceland given the size of its banks prior to collapse. The irony is that they seem to have been lucky because of this. If the banking system there had been sufficiently small they would have gone for it and suffered a much longer recession without the recovery they have seen. I'm not suggesting here that they don't still have many problems, but most observers would agree that they have done very well considering the scale of their initial crisis.
While I don't agree that "stabilisation of the currency is exactly the same thing as preventing bank runs", I do agree that capital controls may help in preventing money leaving the banking system. It may be preventing bank runs in Cyprus for example, but this is because they have no other option but to implement them. Where I disagree is the extent of the need for them in Iceland. I've already put forward reasons for this so I won't repeat them again.Stabilisation of the currency is exactly the same thing as preventing bank runs, though, because it's the capital flight from the currency abroad that destabilises the currency. Sure, it's broader, in the sense that it also prevents flight from krone denominated shares, but to a large extent, stopping money fleeing the country is stopping money fleeing the national banking system.
What I'm glad we agree on is my initial point on this thread that the existence of Iceland's central bank and it's ability to provide liquidity to the new banks, in itself, helped prevent a bank run. I'm willing to take the charitable view that you thought I was talking about central banks in general (including the ECB) and not the Icelandic central bank at that point in time when you were raising your objections.0 -
Yes, if you like. I wasn't making a claim about central banks in general but a specific one about the central bank in Iceland at that particular time. But I already explained this in an earlier post.
The existence of a central bank in Iceland at that time with a willingness to provide whatever liquidity was required was what enabled them to prevent a bank run before any capital controls were put in place.
Now you have it. From the context of the thread you will see that this is exactly what I meant. You gave the strong impression of not understanding that a central bank under such circumstances of Iceland at the time will provide whatever liquidity is necessary and therefore the people have no need to worry that the banks will run dry.
Whatever your understanding up until now I'm glad we agree that this is the case.
Well, where I disagreed was fundamentally on the point that this was something that we needed to learn from Iceland, since the same happened in Ireland - bank runs were prevented by belief that the sovereign and/or central bank would stand over the deposit guarantee. In addition, or perhaps on the contrary, I think capital controls have remained necessary in Iceland to prevent deposit flight, while they have never been instituted in Ireland. There wasn't exactly much of a time gap between the bank failures and capital controls in Iceland - the controls came in on the 6th October 2008, the day before Landsbanki and Glitnir were handed over to receivers, and three days before Kaupthing went the same route.[On the issue of the banks being on the verge of failure in Ireland but not yet failed]
No, the banks actually failed in Iceland. They were not bailed out at that time. New banks were set up and Icelandic deposits moved to them as well as assets from the old banks. The entire banking system was recreated almost overnight.
It was at this stage that a run might have happened if Iceland did not have it's own central bank.
The capital controls were in place by that point. I do agree, as I said, that a central bank willing to stand over the deposits is a necessity, but it's impossible to judge the amount of confidence inspired by the CBoIc in the presence of capital controls.[On the issue of splitting the banks into two parts in Iceland]
Yes, but the State in the case of Ireland was on the hook for all the poor assets and debts of the bad bank. What Iceland did was let the bad part of it fail. Ireland could not have got away with this because we did not have a central bank to support the good bank unlike Iceland. The ECB, I think we can agree, would not have countenanced it at that time, especially under Trichet.
That I'm not sure about, although certainly Trichet was not particularly accommodating - on the other hand, it was European pressure that got Anglo split up in the end. What we do know is that it wasn't requested.[On whether or not Ireland was forced into the blanket guarantee.]
My recollection of events is that next to no solutions were applied in Ireland until shortly before the blanket guarantee was put into place. By which time it was too late. Both countries are alike in that they did not see the problems coming and did not implement the proper solutions in good time.
Something like an Icelandic solution in Ireland would only have been possible, as I've said a number of times might have been possible (there would have been differences in Ireland's case) but only if Ireland had at that time, its own cenctral bank. It did not, so we got the blanket guarantee.
You are correct, however, in that the blanket guarantee would not have been available to Iceland given the size of its banks prior to collapse. The irony is that they seem to have been lucky because of this. If the banking system there had been sufficiently small they would have gone for it and suffered a much longer recession without the recovery they have seen. I'm not suggesting here that they don't still have many problems, but most observers would agree that they have done very well considering the scale of their initial crisis.
Sure - I'm on record here a few years ago saying that what I was expecting was that Ireland would turn out to be absolutely at the limit of sustainability, where Iceland and Greece were clearly over it, which meant that in effect we would suffer the maximum possible misery without having a clear case for the drastic measures made available to or taken by those countries.While I don't agree that "stabilisation of the currency is exactly the same thing as preventing bank runs", I do agree that capital controls may help in preventing money leaving the banking system. It may be preventing bank runs in Cyprus for example, but this is because they have no other option but to implement them. Where I disagree is the extent of the need for them in Iceland. I've already put forward reasons for this so I won't repeat them again.
What I'm glad we agree on is my initial point on this thread that the existence of Iceland's central bank and it's ability to provide liquidity to the new banks, in itself, helped prevent a bank run. I'm willing to take the charitable view that you thought I was talking about central banks in general (including the ECB) and not the Icelandic central bank at that point in time when you were raising your objections.
And I hate to refuse your charity, but must, alas! I am specifically disagreeing that one can make such a claim about Iceland's central bank during the collapse of their banking system because of the existence of highly confounding factors, specifically the capital controls whose institution preceded the collapse of the banks, but to a lesser extent also the small size and high social cohesion of Iceland.
regretfully,
Scofflaw0 -
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