Iceland did it right!

Should Europe have followed Iceland in letting go bust their banks to avoid a sovereign crisis and impoverish the population to cover banks' bad debt?


Nobel prize winning economist Joe Stiglitz notes:

What Iceland did was right. It would have been wrong to burden future generations with the mistakes of the financial system.

Nobel prize winning economist Paul Krugman writes:

What [Iceland's recovery] demonstrated was the … case for letting creditors of private banks gone wild eat the losses.

Krugman also says:

A funny thing happened on the way to economic Armageddon: Iceland’s very desperation made conventional behavior impossible, freeing the nation to break the rules. Where everyone else bailed out the bankers and made the public pay the price, Iceland let the banks go bust and actually expanded its social safety net. Where everyone else was fixated on trying to placate international investors, Iceland imposed temporary controls on the movement of capital to give itself room to maneuver.

Bloomberg reports:

Iceland holds some key lessons for nations trying to survive bailouts after the island’s approach to its rescue led to a “surprisingly” strong recovery, the International Monetary Fund’s mission chief to the country said.

Iceland’s commitment to its program, a decision to push losses on to bondholders instead of taxpayers and the safeguarding of a welfare system that shielded the unemployed from penury helped propel the nation from collapse toward recovery, according to the Washington-based fund.

Iceland refused to protect creditors in its banks, which failed in 2008 after their debts bloated to 10 times the size of the economy.

The IMF notes:

[The] decision not to make taxpayers liable for bank losses was right, economists say.

In other words, as IMF put it:

Key to Iceland’s recovery was [a] program [which] sought to ensure that the restructuring of the banks would not require Icelandic taxpayers to shoulder excessive private sector losses.

Icenews points out:

Experts continue to praise Iceland’s recovery success after the country’s bank bailouts of 2008.

Unlike the US and several countries in the eurozone, Iceland allowed its banking system to fail in the global economic downturn and put the burden on the industry’s creditors rather than taxpayers.

The rebound continues to wow officials, including International Monetary Fund chief Christine Lagarde, who recently referred to the Icelandic recovery as “impressive”. And experts continue to reiterate that European officials should look to Iceland for lessons regarding austerity measures and similar issues.

Barry Ritholtz noted last year:

Rather than bailout the banks — Iceland could not have done so even if they wanted to — they guaranteed deposits (the way our FDIC does), and let the normal capitalistic process of failure run its course.

They are now much much better for it than the countries like the US and Ireland who did not.

Bloomberg pointed out February 2011:

Unlike other nations, including the U.S. and Ireland, which injected billions of dollars of capital into their financial institutions to keep them afloat, Iceland placed its biggest lenders in receivership. It chose not to protect creditors of the country’s banks, whose assets had ballooned to $209 billion, 11 times gross domestic product.

“Iceland did the right thing … creditors, not the taxpayers, shouldered the losses of banks,” says Nobel laureate Joseph Stiglitz, an economics professor at Columbia University in New York. “Ireland’s done all the wrong things, on the other hand. That’s probably the worst model.”

Ireland guaranteed all the liabilities of its banks when they ran into trouble and has been injecting capital — 46 billion euros ($64 billion) so far — to prop them up. That brought the country to the brink of ruin, forcing it to accept a rescue package from the European Union in December.

Countries with larger banking systems can follow Iceland’s example, says Adriaan van der Knaap, a managing director at UBS AG.

“It wouldn’t upset the financial system,” says Van der Knaap, who has advised Iceland’s bank resolution committees.

Arni Pall Arnason, 44, Iceland’s minister of economic affairs, says the decision to make debt holders share the pain saved the country’s future.

“If we’d guaranteed all the banks’ liabilities, we’d be in the same situation as Ireland,” says Arnason, whose Social Democratic Alliance was a junior coalition partner in the Haarde government.

“In the beginning, banks and other financial institutions in Europe were telling us, ‘Never again will we lend to you,’” Einarsdottir says. “Then it was 10 years, then 5. Now they say they might soon be ready to lend again.”

And Iceland’s prosecution of white collar fraud played a big part in its recovery:

The U.S. and Europe have thwarted white collar fraud investigations ... let alone prosecutions. On the other hand, Iceland has prosecuted the fraudster bank heads and their former prime minister, and their economy is recovering nicely because trust is being restored in the financial system.

Volcanoes eruptions that could change the world

Recent new of an increased activity of the Santorini Caldera is certainly bad news for crisis-stricken Greece although an eruption of Santorini as tragic as it would be for Greece and the Mediterranean is not the worst event to worry insurance companies and governments.

Below a list of the 6 nightmare volcanoes that could literally trigger catastrophe on a global scale in a relatively short timeframe.




1. KATLA (Iceland)
Last erupted: 1918
Effects of a major eruption: If Katla goes off, its eruption will be 10 times stronger than Eyjafjallajokull's. Katla's larger ash plume would shoot higher in the air and spread over larger areas of Europe for a longer period, with much more devastating effects on air travel and economic trade. An eruption could tip Europe's economy — perhaps even the world's — back into severe recession or a depression.
Likelihood: Fairly high. The two volcanoes, only 12 miles apart, tend to erupt in tandem, and Katla is slightly overdue in its 80-year cycle.
2. CUMBRE VIEJA (La Palma, Canary Islands)
Last erupted: 1971
Effects of a major eruption: In 2001, U.S. and British scientists warned that a major eruption of Cumbre Vieja could cause the enire western flank of the volcano to fall into the sea, creating a "mega-tsunami" in the Atlantic. Traveling at 500 miles per hour, it would wipe out Florida, coastal Brazil, and parts of Europe with waves up to 160-feet high. 
Likelihood: The scientists say the "year to year probability" of a major eruption is low, but preparations should be taken anyway given the potentially cataclysmic damages.
3. MT. VESUVIUS (Italy)
Last erupted: 1944
Effects of major eruption: Famous for wiping out Pompeii and Herculaneum in 79 A.D., Vesuvius would do much greater damage today. About 3 million people live near the volcano, 600,000 of them in the "red zone." An eruption would kill at least 8,000 people and cause more than $24 billion worth of damage, according to Willis Research Network, which just named Vesuvius the most dangerous volcano in Europe. The ash would change weather patterns in Europe and leave the Naples area a "lifeless desert."
Likelihood: Scientists say Vesuvius is overdue for an explosion.
4. POPOCATÉPETL (Mexico)
Last erupted: 2000
Effects of a major eruption: The third-tallest active volcano in the Northern Hemisphere, Popocatépetl is only 40 miles west of Mexico City and its 18 million inhabitants, and 30 miles east of Puebla, a city of two million. A large eruption could send deadly mudslides into the populous valleys below, creating "catastrophic" loss of life.
Likelihood: After an 80-year dormant period, Popocatépetl is showing signs of activity.
5. MT. TAMBORA (Sumbawa, Indonesia)
Last erupted: 1967
Effects of a major eruption: Tambora erupted in spectacular fashion in 1815 and changed weather patterns around the globe, causing "frosts in Italy in June and snows in Virginia in July, and the failure of crops in immense swaths across Europe and the America." The blow-up killed more than 71,000 people directly, and many more through famine and sickness.
Likelihood: Tambora is still active and, given its history and Indonesia's 222 million inhabitants, closely monitored.
6. YELLOWSTONE "SUPERVOLCANO" (U.S.)
Last erupted: 640,000 years ago
Effects of a major eruption: When the Yellowstone Caldera, or "supervolcano," in Yellowstone National erupts again, it will render a huge swath of North America, from Vancouver to Oklahoma City, uninhabitable. It would have incalculable human and economic consequences. The last eruption of similar magnitude — 73,000 years ago in Sumatra — plunged the entire planet into a decade-long volcanic winter and nearly wiped out the human race.
Likelihood: Geologists see signs that it could be preparing for another major blowout soon, although "soon" could mean thousands of years.

Paying the price

The third episode of Meltdown looks at how the victims of the 2008 financial crash fight back. A protesting singer in Iceland brings down the government; in France a union leader oversees the kidnapping of his bosses; and thousands of families are made homeless in California.

Iceland's most feared volcano: Hekla ready to erupt

Last year's Eyjafjoell and the recent Grimsvotn eruptions will have been a walk in the pyroclastic park if, as AFP reports, the most feared of all Iceland volcanoes, Hekla, is indeed about to blow.
"Experts say one of Iceland's most feared volcanoes looks ready to erupt, with measurements indicating magma movement, raising fears of a new ash cloud halting flights over Europe.

The Iceland Civil Protection Authority says it is closely monitoring the situation.
"The movements around Hekla have been unusual in the last two to three days," University of Iceland geophysicist Pall Einarsson said." Hekla's eruption would certainly have far more dire consequences on European airspace than Grimsvotn: "The volcano, dubbed by Icelanders in the Middle Ages as the "Gateway to Hell," is one of Iceland's most active, having erupted some 20 times over the past millennium, most recently on February 26, 2000. Over the past 50 years, Hekla has gone off about once a decade."

Bankruptcy Outsourcing!

A disturbing trend in a global economy is the bankruptcy outsourcing we are starting to witness in the world.

Global companies are taking bail-outs from different countries and in some cases from more than one at the same time. Bail-outs are becoming for some companies a new form of revenue. GM for example has been bailed-out from the Canadian government after scaremongering plant closures in Ontario. Unicredit the Italian bank which has invested and lent heavily in Eastern Europe has been supported by the Polish and Austrian government. Greek banks have asked contributions to Eastern European countries to leave their capitals in the country and after some weeks moved back to Athens a big bulk of their assets.

Wherever corporations have employment and financial leverage with the local government a bail-out request is being put forward. It is not always a request for money but also a request for favours and deregulation, economic crisis is allowing companies to obtain advantages that until 1 year ago were considered serious infringements. Eastern European governments not notoriously rigid in their supervision are in this period closing not one but both eyes. Companies are threatening that if ad hoc measures are not undertaken their financial situation could be deteriorating and they would be left with no choice than moving their assets and capitals to different location.
Taxpayers are effectively paying a bribe to corporations for the luxury of keeping inefficient, corrupt and broke companies in their backyard. If a company is broke should be allowed to fail, we are delaying the inevitable buying some time with our savings.

Though the interesting scenario especially in Europe will be to assist to the collapse of one of those corporations, which country will take the paternity of a fiasco and will make its citizen pay for this? how fast and how seriously the economical infection will spread to other involved countries?

Unfortunately we have a monetary union in Europe but we do not have yet a single reference for crisis like this, ECB cannot and will not cover the losses leaving to local central banks such issues. The Iceland-England quarrel on the lost assets of UK councils who invested in the failed Icelandic banks teaches us a lesson on how this issue can bring to a fracture or collapse of the European cooperation. If countries will start to freeze each other investments and assets to cover the losses we will have a Great Depression 2.0 in a matter of weeks.