Iceland’s Bankruptcy Aftermath

The below article is quoted word for word from an article on Delusional-Government from Thursday, October 25, 2012.

Various pieces of Occupy Wall Street propaganda have been calling on other countries to follow in Iceland’s footsteps.  Now, the choice must be made to figure out whether countries should follow Iceland’s example, or dismiss the assertions of the Occupy Movement as a fantasy.

In 2008, Iceland was in a state of collapse. Turmoil swept through Iceland in 2009, as Icelanders attempted to retake financial control of their country. Some say little attention was given to the events in Iceland, and that others can learn from Iceland's uprisings and subsequent policies which were put into place following the crisis.

In 2008, Iceland was in a state of collapse. Turmoil swept through Iceland in 2009, as Icelanders attempted to retake financial control of their country. Some say little attention was given to the events in Iceland, and that others can learn from Iceland’s uprisings and subsequent policies which were put into place following the crisis.

Reykjavik, Iceland – Few outside of Iceland will remember seeing Icelanders pelting the Icelandic parliament with rocks in 2009; demanding that bankers and Iceland’s political leaders be held accountable for the bankruptcy and financial collapse of Iceland. Since the end of 2008, Iceland’s banks have forgiven loans equal to 13% of gross domestic product (GDP). The goal of the bailout was to ease the debt burdens of over 25% of the Icelandic population.

Photo Source: Reuters (2008) Icelanders marched with torches over bank bailouts.

Photo Source: Reuters (2008)
Icelanders marched with torches over bank bailouts.

The Iceland bailout was praised by economists and world political revolutionaries, hailing it as “a world record in household debt relief”. Indeed, the steps taken by Iceland to recreate itself since 2008, when Icelandic banks defaulted on $85 billion (USD), appear to have, so far, proven effective. The Organization for Economic Cooperation and Development estimates that Iceland’s economy will outgrow the Euro in 2012, and polls now show that Icelanders do not want to join the European Union, where the debt crisis has remained in a more pronounced manner.

For the time being, Iceland households appear to have been helped by an agreement between Icelandic banks and Iceland’s government. The agreement allowed forgiveness of debt in real estate which exceeded 110 percent of a home’s value. The banks are still partly controlled by the Icelandic government, who also found in a 2010 Supreme Court ruling, that loans indexed to foreign currencies were completely illegal. The ruling meant that Icelandic households no longer needed to cover króna losses.

Iceland’s Lessons in Crisis Management:

In a February 2012 article entitled Icelandic Anger Brings Debt Forgiveness in Best Recovery Story, by Omar R. Valdimarsson for Bloomberg.com, Thorolfur Matthiasson, an economics professor at the University of Iceland in Reykjavik, Iceland said in an interview;

Click here for a link featuring a full size version of this 2008 Infograph

Click here for a link featuring a full size version of this 2008 Infograph

Click here for a link featuring a full size version of this 2008 Infograph. 1 “The lesson to be learned from Iceland’s crisis is that if other countries think it’s necessary to write down debts, it should look at how successful the 110 percent agreement was here. It’s the broadest agreement that’s been undertaken. Without the relief, homeowners would have buckled under the weight of their loans after the ratio of debt to incomes surged to 240% in 2008.”

The $13 billion (USD) economy of Iceland shrank by 6.7% in 2009, before growing 2.9% in 2011. The Icelandic economy is expected to expand 2.4% in 2012 and 2013. By comparison, the Euro was expected to grow only 0.2%, and the outlook for the U.S. dollar is equally dismal.

Iceland’s approach of putting the needs of its population ahead of the markets was admirable. Fitch Ratings has even raised Iceland back to investment grade, with a stable outlook. It appears that the crisis has ended, with Iceland’s historic and rather unorthodox crisis policy response has been a sweeping success.

Now, the question on everybody’s mind is; “will Iceland fall again to it’s past mistakes and hubris? Or, will it pull ahead as a great and epic tale of moral success?”

The Collapse of Iceland Yet to Come:

Comments: Do you believe Iceland is in recovery?

Comments: Do you believe Iceland is in recovery?

The current Icelandic Housing Bubble is part of the Nordic Housing Bubble, and the Post-2009 Northern and Western European Housing Bubble. The Icelandic Housing Bubble is relatively unique, as it has been reinflated due to monetary controls that were created in response to the infamous collapse of 2008.

At the turn of the last millennium, until 2008, the United Nations considered Iceland as having the highest standard of living in the world.  Much of Iceland’s economy was due to fishing exports and tourism until the 2000s. That was when many Icelandic fishermen became bankers and real-estate investors.

Icelandic citizen debt skyrocketed during that initial bubble period; achieving an astounding household spending of 214% of disposable income.  Money flowing into Iceland helped inflate Iceland’s banking sector. Iceland’s three major banks accounted for 3/4 of Iceland’s stock market capitalization.  Loans and assets of Iceland’s three banks sailed over ten times GDP.

Economic equality protesters have been distributing propaganda lauding Iceland's economic success.

Economic equality protesters have been distributing
propaganda lauding Iceland’s economic success.

A propaganda piece from Occupy Wall Street shows a picture of a viking, with the adjacent text reading; “It’s Time to Get Icelandic on Wall Street. Iceland let it’s three largest banks fail, instead of bailing them out, it ensured that domestic depositors got their money back and gave debt relief to struggling homeowners and to businesses facing bankruptcy. And, their economy is booming!!!” Economic equality protesters have been distributing propaganda lauding Iceland’s economic success. 1 When Iceland faced financial collapse and nationalized it’s banks in 2008, it shocked the world when it refused to bailout banks with taxpayer money, as the United States and various other nations have done.  Instead, Iceland chose to default on $85 billion (USD) in loans, causing Iceland’s OMX stock index to collapse, and Icelandic currency values to crumble.

Despite high unemployment rates, Iceland’s recovery is significant. This is especially true when compared to the United States and other countries of Europe, which are all still struggling. In addition, Iceland has seen a strong revival in fishing exports and tourism.

But, there is much more to Iceland’s story.  In fact, according to Jesse Colombo of TheBubbleBubble.com, Iceland’s initial default may only be the tip of the Icelandic Iceberg.  For the recovery in Iceland is being strengthened by a reinflated economic bubble.

From the 2001 to 2008, housing prices in Iceland rose an astonishing 150%, and have since receded a mere 12%. According to Colombo, the primary reason behind Iceland’s positive economic recovery, is that Icelandic property values have not dropped the way it has in the United States and other European countries.

Since prices bottomed out in 2009, they have risen nearly 12%, meaning Iceland is back near it’s bubble high. Iceland prices are rising congruent to the other countries which make up the Nordic Economic Bubble.  Furthermore, the Icelandic Bubble is being heavily influenced by currency controls which are retaining foreign capital from flowing out of the country, until at least 2015.

Chart Source: GlobalPropertyGuide.com  Graph by: TheBubbleBubble.com

Chart Source: GlobalPropertyGuide.com
Graph by: TheBubbleBubble.com

Clearly, property is still grossly overvalued. The choice of the Icelandic government to isolate itself financially only elevates the possibility of an acceleration of the Icelandic Bubble.  As of 2012, Iceland’s bubble is already at its previous high, and accelerating roughly as fast as it did before it’s 2008 collapse.  In addition, now that many seem to believe that the country is in recovery, Icelanders appear to have returned to their old ways.  Money supply growth rates have been doing so at the same rate as was seen in the mid-1990’s.  Skyrocketing consumer spending and household debt has also made a return to the old normal.

TheBubbleBubble.com is theorizing that Iceland is still in a monumental bubble, and has learned very little from the recent global financial crisis.  Colombo’s bubble theory currently pegs the future collapse of the Icelandic Bubble to the collapse of the Nordic Housing Bubble.  It is likely such an event will be much more severe than the crisis of 2008, and will expose the shallowness of the post-2009 Icelandic Recovery, along with the hidden fallacy of the Nordic investment safe havens.

Sometime near the middle of this decade, Iceland and other Nordic nations will face a devastating collapse.

Now it’s your turn; do you believe Iceland is in a full recovery? Or, have those in the the Icelandic Government and Occupy Wall Street movement spoken too soon? Please add your comments in the comment section, below.

"The American dream is not that every man must be level with every other man. The American dream is that every man must be free to become whatever God intends he should become." Ronald Reagan

Posted in Economics, Geo-politics