Greining ástandsins

Þetta er athyglisverð lesning, skrifað af Carsten Vaalgren frá Danske Bank, kemur af bloggi Financial Times og lýsir því ágætlega sem hér er að gerast:

“ With my team at Danske Bank I was responsible for a piece on Iceland in March 2006 called “Geyser Crisis” (can be googled). The unsustainable leverage of the Icelandic Banking sector in foreign currency was plain to see back then. Indeed we included a scary chart on foreign currency reserves to bank assets. We also took the liberty to argue that an Emerging Market style currency crisis/currency run and a sovereign default could happen.

As a result I had to go to Reykjavik back then and got a pretty hot reception. The Prime Minister publicly denounced our research piece, ans banks issued denials. Also Frederick Mishkin was paid(?) by the Icelandic chamber of commerce to write a piece on Icelandic Financial Stability in May 2006 refuting our conclusions + arguing that there might be weaknesses but that they could be addressed. I still wonder why Mishkin would lay name to that.

In essense 2½ years ago all these problems were in the open. Yet Icelandic authorities has not acted and the banks were not reigned in (enough).

Iceland is hardly to blame for the credit crisis, and I dont think the country deserve what is now happening. But the risks have been plain to see for years (you have also written on then previously), and the mini crisis in the spring of 2006 now looks like a missed opportunity for decisive political action against the banks expansion of balance sheets in foreign currency.

Moreover, the almost comic events over the last week do not make Icelandic authorities look good:

1. Glitnir first nationalized and now not but in receivership, so that the State can avoid the liabilities which it cannot pay.

2. Icelandic authorities announce Russian deal. Then Russia says its not done

3. Iceland announce peg. Then does not defend it. Complain that market makers doesnt defend it (!). Then abandon peg.

4. Iceland complain that other countries dont support

I truely regret the fate of the ordinary Icelandic taxpayer. But the truth is that a closeknit high flying Icelandic elite has been playing risky leverage games using his balance sheet as indirect guarantee for years.

This is partly understood publicly in most Nordic countries. Denmark and Danish tax payers ended up paying about $1bn for a similar but smaller leverage game on the Faroe Islands 10 years ago.

Iceland has had a wildly inflationary history over the past 50 years, partly because domestic politicians and the elite has always had a hard time staying within budget constrains. Using the inflationary route as a way out has always been a habit and the economy remains widely inflation indexed. Although I hold the staff at Sedlabanki in high regard, institutions are generally weaker than in many other developed countries, partly due to the smallness of the country and the close ties in the community. The central bank Governor is a former prime minister just to make an example.

In this context it should be no surprise that no Politician in the Nordic countries will or can shoulder a bail out. It would be political suicide.

Therefore complaining that no one now comes to the rescue is strange.

Btw. $10bn might not sound a lot. But it is like the US asking for a $10trn loan. That is a loan the size of the entire US household mortgage debt stock.„