Ice, Ice Baby – Iceland’s people give cold shoulder to paying for acts of reckless bankers.
Note to the reader… Just in case you’re not all that interested in Iceland, I would encourage you to remember that it’s me writing this, and therefore it might not be entirely about Iceland. Just a thought…
When Iceland’s online bank, Icesave, failed, the British government stepped in and covered $3.8 billion in deposits that its citizens were owed by the bank. The Dutch government did the same to the tune of another $1.8 billion. Iceland’s three largest banks collapsed as a result of the meltdown in the global financial markets and the result was that the country’s deposit-insurance, like our FDIC, was overwhelmed.
Now, the British and Dutch governments want their money back, but Iceland’s people are saying, well… no, not to put too fine a point on it. You might even say that the Icelanders are saying: “Hell no!”
The BBC is reporting that the British and Dutch governments say they’re disappointed that after over a year and a half trying to reach an agreement, their best offers continue to be rejected.
Most recently, Iceland’s President Olaf Ragnar Grimsson vetoed the latest repayment plan proposed by London, saying that the people along with the Althingi, the name of Iceland’s thousand-year-old Parliament, will decide this matter. The latest deal offered allows for repayment by 2046 at about a 3% APR, which many in Iceland say are egregious terms.
The country’s parliament voted for a referendum on the Icesave bill that is scheduled for March 6th, but the BBC’s story says that Iceland’s government hopes that a deal can be reached before that date, presumably because the people are expected to vote no… again.
Last time out, back in 2009, 93.2% of Iceland’s voters rejected the bill, and “˜yes’ votes came in third at only 2,599, because 6,744 voters turned in blank ballots. The Icelanders are not happy. Many blame the EU for failing to regulate the bank, and workers interviewed responded by saying things like, and I’m paraphrasing here… “Why should we have to pay for the reckless acts of a handful of greedy bankers?”
Mish Shedlock of Global Economic Analysis thinks it’s a darn fine question. He supports the people of Iceland and hopes they get the chance to tell the Brits and the Dutch to go pound sand. Mish’s position is simple to understand:
“Here’s the deal. When you make stupid investments, don’t expect to be bailed out. There is no reason the people of Iceland should have to pay for the stupidity of others.
If the UK and Dutch governments were dumb enough to guarantee those deposits, then the UK and Dutch governments should pay the price, not Icelandic citizens.”
Mish sees the “best offer” rhetoric coming out of London as being unbridled arrogance. He says that it’s Iceland that should be making the offer, not the Brits and the Dutch.
“It is up to Iceland to make its best offer not for the UK and Dutch governments to make demands of 100% repayment. Why should Iceland crucify its taxpayers with a “loan” when the correct procedure is a massive haircut?
Iceland should immediately counter with its “best offer” of one cent on the dollar. That will set the tone for reasonable expectations.”
It’s pretty clear that most Icelanders agree with Mish, taking the position they should not be penalized because their government has failed to rein in its spending… much less for the excesses of several of the country’s banks.
Across the EU, the majority of people just don’t want to have to pay for the acts of a relative few. And with Iceland’s unemployment still rising, there aren’t many who feel like they should have to pick up the tab for Icebank’s failure.
Icelanders aren’t too pleased with London for using anti-terrorist legislation to freeze the assets of Icelandic banks when the meltdown happened, and I must admit… that was not the most diplomatic of responses, all things considered.
The amounts owed represent about half a year’s economic output for the entire country, and Iceland’s economics minister, Gylfi Magnusson, has been quoted as saying:
“The magnitude of those payments are such that we would have little left for anything else”
And that’s unquestionably true. Can you even imagine the U.S. being offered a plan to repay a debt caused by the acts of our bankers and a failure of our regulators, that required us to repay an amount equal to one half of our country’s economic output for an entire year? Can you even imagine what that would be like here in this country? I shudder to think…
Hang on… maybe you don’t have to try to imagine such a scenario. Maybe you could just read Bloomberg from last June.
“U.S. Debt Poised To Exceed Annual Economic Output, Jun 4, 2010
President Barack Obama is poised to increase the U.S. debt to a level that exceeds the value of the nation’s annual economic output, a step toward what Bill Gross called a “debt super cycle.”
(The) U.S. gross domestic product and the government’s total debt, rose past $13 trillion for the first time this month. The amount owed will surpass GDP in 2012, based on forecasts by the International Monetary Fund.”
For anyone not already familiar, Bill Gross is the founder of PIMCO, the firm generally referred to as “the world’s largest bond holder,” so it’s fair to assume that he knows a fair amount about debt and where things are headed in that regard. Bonds, after all are debt, as opposed to stocks, which are equity.
At the end of last year, PIMCO called for the break-up of the EU. As reported by examiner.com:
“PIMCO the largest bondholder in the world called for a split in the Eurozone between the more productive North including Germany and the Netherlands, and the south incuding Portugal and Spain. Many analyst believe that Spain and Portugal are next in line to be targeted by bondholders and credit rating agencies.”
“The crisis in the Eurozone was fueled by property speculation and cheap credit, which came mainly from Germany.”
Well, all I can say is that it’s a good thing we’re not talking about the source of our problems here in the U.S.A. Because if we were having the same sorts of problems, well… I’d be pretty worried… hey, wait a minute… didn’t we have the same sorts of shenanigans going on here? I could have sworn…
The examiner.com story on PIMCO continues:
The bankers have cost the Irish government, which back their private losses, hundreds of billions of Euros that are equivalent to 100% of Irish GDP.
Unlike Ireland, Iceland did not guarantee private bank losses, and deflated its currency. Iceland has now emerged from recession, and forced bondholders to take losses on their bad bets.”
Okay, let’s get back to Iceland… before I start to itch uncontrollably…
The issue of whether Iceland will cover all of the debts of the failed Icesave Bank remaining unresolved is causing some related problems. For one thing, Iceland has applied to join the EU, and that application is on hold pending a resolution of the debt. And Iceland has also applied for loans from the International Monetary Fund (“IMF”) and that application is said to have stalled, even though the IMF says that the two things are unrelated and one should not be dependent on the other.
According to the BBC:
“An application for about $4.6bn in loans from the International Monetary Fund appears to have stalled. The IMF has said that the Icesave dispute should have no impact on the loans. But Britain and the Netherlands, along with Nordic countries, are thought to have made the loans conditional on Iceland repaying international debts.”
Well, that certainly makes things anything but clear for me, but this next part I had no trouble understanding:
“Rating agency Moody’s said recently that the deadlock may force it to downgrade Iceland’s debt to junk, making it even harder for the country to borrow much-needed funds on the international market.”
Now, that certainly doesn’t seem like it will help Iceland’s situation. I mean, if Moody’s downgrades Iceland’s credit rating, that will only increase the interest rate that the country is forced to pay if it wants to sell its bonds to investors.
But, at least Moody’s isn’t just slapping triple “˜A’ ratings on bonds anymore, they’ve corrected all those problems, right? They must have. I’m sure the ratings agencies, including Moody’s, are running much tighter ships than in the past.
What kind of bothers me is that just a few days ago, I was reading about a securitization of just under $300 million in mortgage-backed securities about to be offered to the public and Moody’s refused to rate it. Why? Earthquake risk. No, I’m not kidding… here’s the story on CNN/Money/Fortune:
Moody’s read the prospectus and calculated that at least 18% of the 303 mortgages in the pool are located in the San Francisco Metropolitan Statistical Area, a definition used to identify the Bay Area’s earthquake prone region. “If a major earthquake were to strike the San Francisco MSA,” writes Moody’s in a report embedded below, “the decline in the values of damaged properties, and the likelihood that borrowers could abandon properties whose value has plummeted, will likely result in either losses to senior certificate holders or deterioration of the credit quality of the certificates to junk status.”
So, maybe Moody’s isn’t just trying to pressure Iceland to agree to repay the British and Dutch governments for the failure on the Icesave Bank… maybe Moody’s is thinking of downgrading Iceland’s credit rating because they just found out that the country could have an earthquake sometime in the next thirty years.
I’ll tell you… it sure is reassuring to be able to count on the bond ratings agencies as being quality organizations that would never knee-jerk react to a crisis thus allowing the proverbial pendulum to swing too far in any one direction. Earthquakes, huh? Well, alrighty then…
So, as it said further on in the Bloomberg story, about the United States remember, published last June and referenced above:
“Over the long term, interest rates on (U.S.) government debt will likely have to rise to attract investors,” said Hiroki Shimazu, a market economist in Tokyo at Nikko Cordial Securities Inc. “That will be a big burden on the government and the people.”
Gross, who runs the world’s largest mutual fund at Pacific Investment Management Co. in Newport Beach, California, said in his June Outlook report that “the debt super cycle trend” suggests U.S. economic growth won’t be enough to support the borrowings “if real interest rates were ever to go up instead of down.”
Conclusion…
I sure hope I didn’t jump around too much telling this story of Iceland… this was a story about Iceland, wasn’t it?
I certainly didn’t mean to imply that what’s happening in Iceland or in the EU has anything to do with our problems with debt here in the U.S. We’re on a much stronger course… we’re planning on borrowing our way out of our debt and then pumping the trillions raised directly into our banks.
Besides, I would never compare Iceland to this country… I mean, there are several key differences between there and here. For one thing, I’m almost positive that we don’t have nearly as much ice as Iceland does. I could be wrong about that, I live in Southern California, so what I know about ice you could put in a thimble.
Another key difference is that we don’t have a president who would turn down a repayment deal such that was offered to Iceland by the British and Dutch governments, saying that the people of the United States are going to decide the issue. No, over here, our government would be much more likely to agree to the deal without telling anyone, and hide the amounts owed somewhere on the un-auditable balance sheet of the Federal Reserve, or within the 3,000 page text of a future bill called something like the Americans for Economic Recovery Act of 2012.
There’s probably other differences too… like their names… we don’t have anyone named: Olaf Ragnar Grimsson, unless maybe its someone who is starring in “The Grinch Who Stole Christmas.”
Will the bond holders of Greece, Spain, Portugal, Ireland, and of course, Iceland… have to take a haircut and accept a lesser amount than what’s owed? I have no idea. I’m just relieved that what’s going on in those places has absolutely nothing to do with what the problems our country is likely to be facing in the future. Big relief, wouldn’t you say? Huge.
We don’t have to worry about that sort of thing because our banks are healthy, and we’re allowed to just borrow as much as we want to without consequence… forever and ever… Amen.
Isn’t that right, Mr. Geithner, Mr. Bernanke and Mr. Obama?
Mandelman out.