26/12/2014: "Iceland: How Could this Happen?"

Always interesting and never ending debate about Iceland v Ireland can only be aided by the following recent paper by Gylfason, Thorvaldur, titled "Iceland: How Could this Happen? (see CESifo Working Paper Series No. 4605: http://ssrn.com/abstract=2398265).

The author "reviews economic developments in Iceland following its financial collapse in 2008, focusing on causes and consequences of the crash. The review is presented in the context of the Nordic region, with broad comparisons also with developments elsewhere on the periphery of Europe, in Greece, Ireland, and Portugal. In some ways, however, Iceland resembles Italy, Japan, and Russia more than it resembles its Nordic neighbors or even Ireland. The paper also considers the uncertain prospects for reforms and restoration as well as the possible effects of the crash on social, human, and real capital and on long-run economic growth."

To add, two charts of my own, really self-explanatory:

26/12/2014: Advanced Economies: Public Debt Explosion 2008-2014

Some interesting insight into the legacy of the Great Recession that we are carrying over into 2015. From the start of 2008 through 2014:

• Average increase in gross debt of all advanced economies was 27.2 percentage points of GDP, with a range from a decrease of 21 percentage points for Norway and an increase of 88.5 percentage points for Ireland. Thus, the average annualised rate of increase in government debt over the period was around 3.47 percentage points of GDP with a range of -2.76 percentage points annualised decline for Norway and a 9.48 percentage points annualised increase in Ireland.
• Average change in the gross government debt of the group of countries where debt declined over the crisis was -12.0 percentage points of GDP. There were only 3 countries in this group.
• Average increase in gross government debt of the group of countries with benign levels of increase (levels of increase consistent roughly with offsetting GDP contraction over the crisis period) was 4.8 percentage points of GDP. There were only 5 countries in this group and only two of these were in Europe, with none (at the time of the crisis onset) being members of the euro area.
• Average increase in gross government debt within the group of countries where debt rises were moderately in excess of contraction in the economy was 16.4 percentage points of GDP.
• Average increase in gross government debt within the group of countries with debt increases significantly in excess of economic contraction was 26.6 percent of GDP.
• Average increase in the government debt within the group of countries with severe debt overhang was 60.4 percentage points of GDP, with a range of increases in this group between 41.6% for the U.S. at the lower end and 88.5% of GDP for Ireland at a higher end.

Chart above summarises these facts and also highlights the extent to which Ireland's government debt increases were out of line with experience in all other countries, including Greece and all other 'peripheral' economies.

The average rise in gross government debt across all peripheral economies 2008-2014 was 56.5 percentage points of GDP (excluding Ireland), which is more than 1/3 lower than that for Ireland. Our closest competitor to the dubious title of worst performing sovereign in terms of debt accumulation is Greece, which experienced a debt/GDP ratio increase almost 1/4 lower than Ireland.

And in case you wonder, our Government's net debt position is not much better:

12/1/2014: Icelandic Banks Crisis: Failure to Enforce?

A detailed account of the Icelandic crisis and the failure of regulatory enforcement (not necessarily of regulatory easing) in propelling risky behaviour by the banks: http://www.voxeu.org/article/gambling-resurrection-iceland

29/12/2013: Icelandic Model for Debt Crises Resolution?

A very comprehensive paper analysing the Icelandic approach to personal debt and corporate insolvency crises resolution:
http://hhi.hi.is/sites/hhi.hi.is/files/W-series/2013/WP1310.pdf

Latest comparatives between Icelandic and Irish economic performance: http://trueeconomics.blogspot.ie/2013/10/27102013-ireland-v-iceland-full-deck.html

27/10/2013: Ireland v Iceland: Full Deck

Here's the deck for comparatives between Iceland and Ireland. You can click on every slide to enlarge. Enjoy!

14/7/2013: Banking Reforms : recent links

Some recent articles on Banks Reforms in the global and EU context:

"A viable alternative to Basel III prudential rules" by Stefano Micossi (9 June 2013) argues that Basel III "…proposed reforms will fail to correct flaws in the old system. The new rules are even more complicated, opaque and open to manipulation. What is needed is a radical shift to prudential rule based on a straight capital ratio."
Link: http://www.voxeu.org/article/viable-alternative-basel-iii-prudential-rules


And in a typically Bruegelesque fashion, "Basel III: Europe’s interest is to comply" by Nicolas Véron (5 March 2013) argues that since "the EU was once a champion of global financial regulatory convergence", then "the EU should drop its lacklustre inertia and pursue Basel III because, in the end, it’s in its interests to comply. EU policymakers ought to aim at enabling the adoption of a Capital Requirements Regulation that would be fully compliant with Basel III."
Link: http://www.voxeu.org/article/basel-iii-europe-s-interest-comply

His colleague, Daniel Gros is of a view that diversification is a good thing, but diversification not i regulatory space. In his "EZ banking union with a sovereign virus" (14 June 2013) he argues that: "The doom-loop between banks and the national governments played a dominant role in the Eurozone crisis for Ireland and Cyprus. A Eurozone banking union is usually viewed as the solution. This column argues that the doom-loop cannot be undone as long as banks hold oversized amounts of their government’s debt. A simple solution would be to apply the general rule that banks are prohibited from holding more than a quarter of their capital in government bonds of any single sovereign." Here's the problem, however, in both Cyprus and Ireland sovereign bonds holdings of own governments were not a problem. In Cyprus the problem was holding of Greek Government bonds, and in Ireland, the contagion mechanism was from inter-bank lending and banks' own bonds issuance to the sovereign via a blanket 2008 Guarantee.
Link: http://www.voxeu.org/article/ez-banking-union-sovereign-virus


"Implementation of Basel III in the US will bring back the regulatory arbitrage problems under Basel I" by Takeo Hoshi (23 December 2012) says that "rejigging financial regulation is in vogue. But, in the world of international finance, how well do different regulatory systems join up?" In the US context, the author "argues that the US Dodd Frank Act and Basel III are, in part, incompatible and that harmonising them may lead to unintended consequences. The US ought to tread carefully here but should also try hard to maintain the spirit of better financial regulation."
Link: http://www.voxeu.org/article/implementation-basel-iii-us-will-bring-back-regulatory-arbitrage-problems-under-basel-i


There's a huge amount of opinion published on Voxeu.org on bank regulation: http://www.voxeu.org/debates/banking-reform-do-we-know-what-has-be-done


ZeroHedge classic: http://www.zerohedge.com/node/475643 "The Secret Sauce Of Iceland's Success Story: Debt Liquidation?" argues that "That Iceland is so far the only success story in the continent of Europe, which continues sliding into an ever deeper depressionary black hole, as a result of the complete destruction of its financial sector and its subsequent rise from the ashes, is by known to most. …As it turns out, perhaps the biggest jolt to Icelandic economic growth is what we said was the correct prescription for resolving not only the US but global growth malaise that struck in 2008: debt liquidation."


Irish Times covers the outright bizarre and sublimely ironic day-dreaming that is going on in Ireland's highest policy circles. The latests instalment is transformation of the IFSC into a sort of "We've screwed up so comprehensively, we can sell this as competence" story: http://www.irishtimes.com/business/sectors/financial-services/ifsc-faces-radical-rethink-as-effects-of-crash-become-clear-1.1460832?page=2

Pearls of wisdom: "Ryan’s paper makes eight proposals, including “relaunching the IFSC brand” along product lines – global asset finance, a global servicing platform and a global listing platform." All of which have been already in place for years to various success. "The document recommends the creation of a JobsHub to allow firms seeking staff to “find people quickly and cost effectively”." Other things: setting up IFSC as a centre for 'bad banks' on foot of 'experience already present in NAMA'. This is the logic of converting Dublin Bay into a global toxic refuse dump for the UK and European waste disposal, because we 'already have considerable expertise' at the Poolbeg waste facilities. And last, but not least: converting IFSC into "global centre of excellence for property"… Even the Irish Times could not have escaped the obvious irony present in this idea.


Last, but not least, Bloomberg report on Michel Barnier balmy ideas on 'Bank-Crisis' plans for the EU: http://www.bloomberg.com/news/2013-07-09/eu-steels-for-battle-over-bank-resolution-plans-led-by-germany.html from July 9. "The European Union’s executive arm proposed procedures for handling failing banks with a 55 billion-euro ($70 billion) backstop, setting up a showdown with Germany over control of taxpayers’ cash." Good summery of current play on this.

17/5/2013: Ireland v Iceland 2013

Ireland vs Iceland macroeconomic comparatives in 15 simple charts that DofF wouldn't want you to see...

All data is either IMF direct-sourced or based on IMF data. Click on the charts to see more detailed comments imbedded in them.

Three charts on GDP comparatives:

Investment:

External trade and balance:

Unemployment and Employment:

Government Finances:

18/1/2013: Iceland's U-shaped Recovery

Back in December, there was quite a bit of controversy stirred around by a short note about the failures of the so-called Icelandic model for dealing with the crisis. The note - a blogpost (and I have no link to it right now) - was alleging that much of the reforms in Iceland were not voluntarily chosen by the Government (which is true), did not result in significant debt relief for homeowners (due to mortgages markets structure differences) and did not produce significant improvements in the economy.

At the time, some readers of the note in Ireland went on to accuse myself of 'talking up' Iceland to promote my 'personal agenda'.

Aside from the above accusations being complete and unadulterated bulls**t (I never said Iceland did everything right or that all of Iceland's policies should be adopted in Ireland), they were based on the reading of one blog post.

Not to stir up any controversy, here's a link to the Danske Bank note on Iceland's economy from December 2012. I am not going to make any judgements here - just read the note. I am reproducing few charts below for those unwilling to read through the entire report.

Quote:

"The recovery of the Icelandic economy has been challenged by the deteriorating conditions in the European trading partners, which account for a large share of the Icelandic exports. It looks like growth in Iceland will perform above most of Europe over the next few years and that its recovery will continue but the level is still well below the pre-crisis level. We expect growth rates of 2.5% y/y in 2012 and 2.2% in 2013. It is also worth noting that recent national account revisions showed that growth in 2011 was adjusted down.

While investment activity and inventories have been rather volatile recently, private consumption has held up relatively well and 2012 should show about 3.8% y/y growth. We expect it will slow somewhat in the following years, to a growth level just below 3%. Investment activity should be fairly solid too and we expect growth rates of about 8-9 % y/y in 2012 and 2013, perhaps with a slightly increasing trend.

Inflation remains above the central bank’s 2.5% target, and has been so for a while, but inflationary pressures have eased somewhat in 2012 and we expect this trend to continue. Our forecast for the GDP deflator is currently 3.7% y/y in 2012 and 3.1% in 2013.

As the economy has been undergoing recovery, the labour market has improved significantly too. While we do not see this trend ending, we do expect it to slow gradually  as the unemployment rate comes down. Consequently, our year-end unemployment rate forecast is 5.8% for 2012, falling to 5.3% in 2013"

Here you go: Iceland's U-shaped recovery and Danske's forecasts for 2013-on:

And for the commentariate loving to accuse me of just dropping numbers to 'fool the readers' - I am not giving a commentary on the above precisely because you accuse me too often of commenting. 

26/10/2012: Few interesting links

Some links on recent studies of interest

Two hugely important studies from the Kauffman Foundation on the role of immigration in entrepreneurship and human capital as a driver of future economic growth.

Iceland's assessment of financial stability for 2012 Q1 covering in detail household debt dynamics (from page 23) and detailing the success of the Iceland's systemic debt restructuring arrangements.

28/9/2012: Two points of note from today's economics news

Two points of note today (and no, none relating to the non-scientific fiction of the Spanish banks stress tests):

Point one: IMF assessment of Iceland's economy (in a second post-programme note):

"Growth has recovered and the outlook is good. Following a deep and protracted recession, the economy grew by 2.6 percent in 2011—a performance that looks set to be broadly repeated in 2012 and sustained over the medium term. The output gap is closing, unemployment has decreased, and inflation, though still high, is expected to converge toward the Central Bank’s target of 2½ percent in the medium term if monetary tightening resumes. Public and external debt ratios are on a downward path and financial sector conditions are improving."

Now, I did stress in italics few bits there…

IMF continues by pointing out that Iceland - to guard against downside risks - should aim to continue current fiscal path and 

"For the 2013 budget, additional measures amounting to about 0.2 percent of GDP would put the overall balance firmly on track for a balanced position in 2014"

Now, the best-in-class Ireland, of course, is aiming to deliver a budgetary deficit of 5% in 2014 - not a balanced budget and to achieve the same target that IMF suggests would take Iceland a precautionary cut of 0.2% of GDP for Ireland would imply dropping deficit by at least 7.7% in 2013. Hmmm… right… the 'bad boy' Iceland = 0.2%, the 'good boy' Ireland = 7.7%…

But wait, the real point two to consider is not about Ireland-Iceland 1-letter difference comparatives, but about Iceland v Euro area ones. Today, Eurocoin - the CEPR and Bank of Italy joint-run leading economic indicator for the Euro area economy came out for September, showing that Euro area economic growth has stabilized at around -0.3-0.5% GDP. Now, run this by me again? Iceland stabilized at around +2.6% growth, Euro area stabilized at around -0.3%… Oh, dear.

See Eurocoin details in the next post...

23/6/2012: Iceland makes another early repayment of IMF funds

Iceland makes another early repayment of IMF funds:

25/02/2012: Poster-boys of Recovery?

So does this really, I mean really, look like a recovery to any one of you?

The chart above plots evolution of nominal GDP in current US dollars from the pre-crisis peak (set = 100 for every country) through years following the beginning of the crisis (t=0). All data - IMF WEO and September 2011-February 2012 country-specific updates.