# Ireland v Iceland



## Chris (16 Feb 2011)

Creating a new thread to avoid going off topic here: 



			
				Chris said:
			
		

> Not too long ago the media said that the only difference between Ireland and Iceland was one letter and 6 months. Truth is though that Iceland went through a very sudden and sharp correction and liquidation, which caused a lot of pain at the time. But now Iceland can borrow on the open market for 50% less than Ireland, it returned to economic growth in Q3 2010, has half the unemployment rate, and its banks have returned to profitability.





Sunny said:


> Chris, you have moved on from using Argentina as a template for Ireland to follow to using Iceland. And again you are being very selective. Just like Argentina, Iceland are not borrowing money in the markets. There are still capital restrictions in place and they only reached a deal to repay to foreign depositors in Dec which is the first step in getting access to international markets. However, they are still messing foreign investors about on the bank debt and until they sort that, they won't be in the market. Their currency devalued by something like 50% since 2008. We don't have that option. As for profitable banks, they may be profitable but they are not functioning. They are achieving something like 18% ROE despite having to have capital ratios of about 15%. (Impossible to achieve in a normal banking system).



Yes I have moved to Iceland, but not because Argentina is no longer a good example of the benefits of default. The main reasons for focusing on Iceland now is because it is a more recent example, stems from the same global crisis, and was precisely used by politicians and the media to demonstrate how not to do it.
You are not correct on Iceland still being locked out of the money markets. Iceland is auctioning bonds off on the open market and the 10 year yield is just over 6%. They will probably face many law suits about outstanding debt, but it is not the taxpayer that will be held accountable (they very clearly said so in their referendum). 
The currency devaluation is probably the worst thing that Iceland did during the crisis. It is a general economic misconception that currency devaluation is some magic trick to ensure a return to growth. The negative effects on import prices negates any benefit on gains in export prices, especially in small countries with heavy dependence on imported goods.
Could you elaborate a bit further on this: "Impossible to achieve in a normal banking system". I'm not sure how you came to this conclusion and what you define as a normal banking system.
Bottom line is that Iceland is in a far better position now than Ireland is, because the pain was not postponed. 
And just to clarify something, I am not saying that default or allowing banks to fail is an easy option with little or no disruptions. What I am saying is that it is the only solution that will ensure the fasted way back to recovery, while at the same time not burdening the taxpayer with guarantees and not creating a insurmountable moral hazard. There simply is no pain free solution for countries like Ireland and Iceland.


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## Sunny (16 Feb 2011)

Chris, they haven't borrowed money internationally. The auctions you talk about are domestic. 

Will try and get back to you about the banks at lunch!


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## Chris (17 Feb 2011)

Foreign investors own very little long dated bonds which was largely sold off when the crisis first hit, but they do own a large portion of the short dated bonds. Iceland has mainly been auctioning short dated bonds, and foreign investors are buying these.

Quote from: http://www.bonds.is/Assets/Daily/isl2.10.htm


> Nonetheless, foreign investors still own the majority of shorter Treasury bonds ¿ that is, those maturing in 2011-2013. Their share in shorter bonds at year-end 2010 was 73%, slightly less than at year-end 2009, when they held 76% of such bonds. Their holdings are strongest in the shortest series, RIKB11, at 79% of outstanding bonds. They also owned 74% of RIKB13 bonds and 57% of RIKB12 bonds.


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## Sunny (22 Feb 2011)

Sorry Chris. Only saw this now. I am not sure what you are showing me. It proves nothing. They are domestic bonds and look at what the amounts they have auctioned. About €12m in one case. Wouldn't pay for 1 day of our deficit. Iceland have not issued a Eurobond since they defaulted and they won't until they approve a settlement with the UK and the Netherlands with regards to Icesave and capital controls are lifted. I do this for a living and I can guarantee you that Iceland do not have access to international capital markets


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## Chris (22 Feb 2011)

Sunny said:


> Sorry Chris. Only saw this now. I am not sure what you are showing me. It proves nothing. They are domestic bonds and look at what the amounts they have auctioned. About €12m in one case. Wouldn't pay for 1 day of our deficit. Iceland have not issued a Eurobond since they defaulted and they won't until they approve a settlement with the UK and the Netherlands with regards to Icesave and capital controls are lifted. I do this for a living and I can guarantee you that Iceland do not have access to international capital markets



Yes, the amounts are small, but they are are being regularly auctioned, I count 6 for February alone. Iceland is also about 8% the size of Ireland, so €12m is roughly equivalent to €120m here. 
The fact that they are not borrowing in € is also a prudent thing, as that is what pretty much crippled them in the first place, i.e. not only too much debt, but too much foreign denominated debt.


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