Tuesday, February 21, 2012

Iceland The Model. Greece The Failure

The contrast between Greece and Iceland are stark to say the least. Both countries had debt problems that seemed insurmountable.  Iceland’s main debt problems came from its banks that went on a lending binge very similar to that of US banks, both making consumer loans and mortgages to people who had no chance of ever repaying. Greece, on the other hand primarily is in trouble because its government spent too much since joining the EU, relying on low interest rates they thought they would last forever.

But what is so interesting is that the two countries have taken exact opposite approaches to resolve the issue which is highly instructive. While countries like Ireland force their citizens (Much like here in the US) to bail out the banks that made bad loans, Iceland twice voted to not pay to bail out their banks and default .

“The island’s households were helped by an agreement between the government and the banks, which are still partly controlled by the state, to forgive debt exceeding 110 percent of home values. On top of that, a Supreme Court ruling in June 2010 found loans indexed to foreign currencies were illegal, meaning households no longer need to cover krona losses.”
And how did Iceland treat their banksters?
“Iceland’s special prosecutor has said it may indict as many as 90 people, while more than 200, including the former chief executives at the three biggest banks, face criminal charges.
Larus Welding, the former CEO of Glitnir Bank hf, once Iceland’s second biggest, was indicted in December for granting illegal loans and is now waiting to stand trial. The former CEO of Landsbanki Islands hf, Sigurjon Arnason, has endured stints of solitary confinement as his criminal investigation continues.”
By contrast, Greece has negotiated one bailout after another adding more EU debt on more EU debt. The latest agreement, at best, kicks the can down the road even further. Just compare the results:
“Iceland’s $13 billion economy, which shrank 6.7 percent in 2009, grew 2.9 percent last year and will expand 2.4 percent this year and next, the Paris-based OECD estimates. The euro area will grow 0.2 percent this year and the OECD area will expand 1.6 percent, according to November estimates.”
In addition, Iceland already is back to having an investment grade rating of BBB- by Fitch.

By contrast, Greece has had a GDP decline of 7% since enacting the first round of austerity demanded by the EU. The latest “rescue” is counting on Greece to return to growth but this is looking highly unlikely.

Iceland recognized that its debt situation could not be resolved. They chose default and the banks were partially nationalized to preserve a functioning system. The needs of the people were put ahead of the needs of the markets and the banks. Greece, by contrast takes on ever more debt and gives up more of their sovereignty to their EU creditors. Their people are suffering under a debt they can never repay. Rather than leaving the EU and the Euro behind, defaulting on their debt, and reissuing the Drachma they are prolonging the pain without the hope of a recovery.

Lesson for us in the US
While Iceland sent its banksters to jail, not a single one here in the US has gone to jail for the massive fraud perpetuated on the American people and the international investors who bought the mortgage derivatives thrown together with loans signed by “Linda Green”.  Even now, not a single arrest has been made resulting from the theft of over a $1 Billion after MF Global stole client money from segregated accounts. In addition, rather than bailing out their banks as the US did, they partially nationalized them. The advantage of this is that there is now an expectation that the government won’t bail them out while in the US the big banks know Bernanke and Congress will always bail them out no matter how bad their behavior. They can keep the profits in the good times and be bailed out by struggling Americans in the bad times.

 Worse, rather than the banks being nationalized, they were allowed to sell their losing mortgage derivative to the US Fed, backstopped by the US taxpayer. Then they were on the one hand allowed to switch from “mark to market” to “mark to myth”. That is, just valuating their failed loans at whatever price they deemed correct. Finally, on the other hand as the Fed embarked on its ZIRP (Zero Interest Rate Policy) policy banks were able to use an accounting trick to revalue their own debt to show phantom income as if they had refinanced their own outstanding debt at the lower rate.
While Iceland’s banks were allowed to fail, Greece is trying to extend and pretend as they always have, following the US’ example. Iceland has endured difficulty but has recovered and is now growing again. The US and Greece however are following the Japanese who have been mired in an economic depression for two decades. We should not expect to have different results.

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