Tag Archives: Iceland

One Good Example, One Bad Example

There's no way like the American way

Newsweek is pointing to Canada as an example to follow in terms of banking regulation.

The legendary editor of The New Republic, Michael Kinsley, once held a "Boring Headline Contest" and decided that the winner was "Worthwhile Canadian Initiative." Twenty-two years later, the magazine was rescued from its economic troubles by a Canadian media company, which should have taught us Americans to be a bit more humble. Now there is even more striking evidence of Canada‘s virtues. Guess which country, alone in the industrialized world, has not faced a single bank failure, calls for bailouts or government intervention in the financial or mortgage sectors. Yup, it’s Canada. In 2008, the World Economic Forum ranked Canada’s banking system the healthiest in the world. America’s ranked 40th, Britain’s 44th.

The must read link however is Michael Lewis’ feature in Vanity Fair about how Iceland basically destroyed their economy beyond recognition for generations to come.

Iceland instantly became the only nation on earth that Americans could point to and say, “Well, at least we didn’t do that.” In the end, Icelanders amassed debts amounting to 850 percent of their G.D.P. (The debt-drowned United States has reached just 350 percent.) As absurdly big and important as Wall Street became in the U.S. economy, it never grew so large that the rest of the population could not, in a pinch, bail it out. Any one of the three Icelandic banks suffered losses too large for the nation to bear; taken together they were so ridiculously out of proportion that, within weeks of the collapse, a third of the population told pollsters that they were considering emigration.

Stimulus Packages From Around the World

Since all our countries (sans Germany) are offering stimulus packages these days, I thought I would see how they stack up against each other.  The American one is by far the biggesest while Iceland’s economy took the hardest hit.  Many economists believe a lot of the figures being announced involved a mixture of truly new money and recycling of existing commitments, so it remains hard to evaluate the impact.

Japan :: The Finance Ministry’s draft budget suggested a spending increase of 6.6 percent to 88.5 trillion yen ($990.9 billion) for the next fiscal year — the biggest ever figure in an initial proposal.  The world’s second-largest economy fell into a recession in the third quarter, and the signs since then point toward more misery ahead. The latest outlook by the Cabinet Office projects Japan’s economy to shrink this fiscal year and manage only flat growth the following year.  The budget proposal said general spending will rise to 51.7 trillion yen ($578.9 billion) in the year starting April, even though tax revenue is projected to fall 13.9 percent to 46.1 trillion yen ($516.2 billion).  As a result, Japan will see its primary budget deficit jump to more than 13 trillion yen ($145.6 billion) from 5 trillion yen ($56 billion) this year, and will boost bond issuances by 31.3 percent to cover the revenue shortfall. – Source: IHT

USA :: Well, according to some sources, to put the bailout dollar amounts into proper historical perspective.   The current Credit Crisis bailout is now the largest outlay In American history. Crunching the inflation adjusted numbers, we find the bailout has cost more than all of these big budget government expenditures – combined:

• Marshall Plan: Cost: $12.7 billion, Inflation Adjusted Cost: $115.3 billion
• Louisiana Purchase: Cost: $15 million, Inflation Adjusted Cost: $217 billion
• Race to the Moon: Cost: $36.4 billion, Inflation Adjusted Cost: $237 billion
• S&L Crisis: Cost: $153 billion, Inflation Adjusted Cost: $256 billion
• Korean War: Cost: $54 billion, Inflation Adjusted Cost: $454 billion
• The New Deal: Cost: $32 billion (Est), Inflation Adjusted Cost: $500 billion (Est)
• Invasion of Iraq: Cost: $551b, Inflation Adjusted Cost: $597 billion
• Vietnam War: Cost: $111 billion, Inflation Adjusted Cost: $698 billion
• NASA: Cost: $416.7 billion, Inflation Adjusted Cost: $851.2 billion

TOTAL: $3.92 trillion

Bailout Cost: $4.6165 trillion dollars.  Of that $4.6 trillion dollars, $1.6 billion went to U.S. bank executive bonuses.

Plus, many economists are predicting another $400 billion in stimulus money once Barack Obama comes to office in January.

Source: BoingBoing

European Union :: In comparison to the American bailout, it is pretty small at $260 billion (1.5% of GDP) but this is on top of IMF interventions in some nations and on top of national efforts as well.   The British government earlier this week announced it would provide a 20 billion pound ($30 billion) fiscal stimulus, centered on a 13-month reduction in the value-added tax charged on most goods and services to 15% from 17.5%.   Germany has announced a package it says will spur investments worth as much as 50 billion euros. France is also mulling measures.  – Source: Marketwatch  For what it is worth, the IMF doesn’t think $200 billion is enough money.

Iceland :: The good news is the small Icelandic economy which was devastated by the credit crunch is recovering according to the IMF.  The economy is still a mess with a $1 billion deficit and Iceland’s key interest rate is currently at 18 percent, the highest in Europe.  The IMF has already paid out some 827 million dollars to Reykjavik, and the rest will be paid out in eight intervals of 155 million dollars provided Iceland meets its quarterly IMF reviews. The government has meanwhile forecast that the public debt would increase from 29 percent of GDP at the end of 2007 to just over 100 percent of GDP at the end of 2009. The IMF said at the end of October it expected the island’s economy to contract by a massive 10 percent next year.  Check out the Financial Times for more indepth news on Iceland’s economy.

Canada :: $30 billion over the next four years.  The Prime Minister doesn’t want to spend that money but the political reality may force him.  While the Canadian banks are doing well, they are hoarding cash right now and not making loans to businesses who need them.  There is also some debate over on how to create the stimulus.

Russia :: The financial crisis is presenting Russia’s ruling elite with the most serious challenge to its power in a decade. The Kremlin has responded by offering a bailout package and economic stimulus measures between them worth over $200 billion.  Russia’s sovereign debt was downgraded by Standard & Poor’s for the first time in 10 years on Dec. 8, stocks have lost about 70 percent of their value since May, and the central bank has spent $160.3 billion in a bid to support the rouble. – Source: Reuters

China :: A stimulus package estimated at 4 trillion yuan (about 570 billion U.S. dollars) will be spent over the next two years to finance programs in 10 major areas, such as low-income housing, rural infrastructure and transportation. Source: Xinhua

Argentina :: $3.8 in stimulus plus government intervention in pension funds and a $21 billion public works program – Source: New York Times

Australia :: 1% of GDP or $10 billion Source: Scoop

Dog eat dog

Just another day in a collapsing global economy.  An Irish and Canadian bank cause some problems for a Wisconsin school board

In separate statements, the Royal Bank of Canada and Stifel Nicolaus said board members signed documents indicating they understood the investments’ risks. Both companies said they were not financial advisers to the boards but merely sold them products or services.

While in Iceland, they may or may not be branded as a terrorist country while England freezes a banks assets.

Icelanders say that it is now nearly impossible to get foreign currency into or out of the country. Many banks have refused even to transfer money to Iceland. Importers are having difficulty paying their foreign bills, and exporters are having trouble getting paid by their foreign customers.

Many people in Iceland are also furious about what happened to Kaupthing Singer & Friedlander. The British government’s seizure of its assets precipitated the immediate collapse of its parent bank, Kaupthing, which the Icelandic government had been propping up and had hoped would survive.

“Kaupthing was the last, best hope of the Icelandic banking system, and it was killed there and then,” Andres Magnusson, an editorial writer for Icelandic Financial News, said in an interview. “This really was the last straw. A lot of Icelanders are asking, ‘Excuse me: who’s the terrorist here?’ ”

In case you were wondering why the Icelandic government doesn’t cough up some money.

“The compensation that we would give would be twice as much per head as the reparations Germany faced in the Treaty of Versailles after the First World War,” she said. “That is something we cannot afford.”

Iceland should know better as any student of history knows nations have no friends, they only have interests and it was in Gordon Brown and England’s best interest today to stab them in the back.

The end result is that Iceland’s GDP could shrink by 85% and according to some articles, have their economy set back 40 years.  While the blame is directed at the banks, this article documents how the fiercely independic Icelandic spirit has made the situation worse.

While the ideal of globalization is that in a global economy we should all be interested in helping each other, the reality is politics is local and Gordon Brown is accountable to the English electorate, not the Icelandic.