Wade búinn að vinna rökræðuna

Í sumar birtist grein í Financial Times eftir breskan háskólaprófessor, Robert Wade. Þar lýsti hann miklum erfiðleikum sem íslenska hagkerfið ætti í vegna óraðsíu og óstjórnar í bönkum, lélegs eftirlits með þeim og gengdarlausrar skuldasöfnunar.

Um þessa grein var fjallað hér á síðunni í sumar. Hún vakti hörð viðbrögð og meðal annars skrifuðu prófessorarnir Friðrik Már Baldursson og Richard Portes grein og lýstu þeirri skoðun sinni að bankarnir íslensku væru traustir.

Hannes Hólmsteinn Gissurarson skrifaði í Fréttablaðið og líkti Wade við Blefken þann sem skrifaði furðubók um Ísland á 16. öld. Þarf varla að taka fram að það er mikil skömm á Íslandi að vera líkt við Blefken sem er í hópi erkióvina þjóðarinnar fyrr og síðar.

Nú þegar er líkt og Ísland hafi lent í fjármálalegu snjóflóði les maður grein Wades aftur og sér að hann hafði rétt fyrir sér um nánast alla hluti – nema kannski síðustu orðin í greininni. Þau gætu þó hæglega orðið að veruleika:

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Iceland pays price for financial excess

By Robert Wade

Published: July 1 2008 19:45

In the second half of last year, as the subprime crisis gathered strength in the US, articles appeared in the international press about Iceland as the “canary in the mine”. They suggested tiny Iceland (population: 315,000) was a leading indicator of how the crisis was mutating into something much bigger, affecting many countries beyond the US.

Since then Icelands economy has continued to decline. Gross domestic product shrank by almost 4 per cent in the first quarter of 2008 compared with the final quarter of last year, when growth was barely positive. The stock market and the currency have both fallen by about a third since the start of this year.

The size of the accumulated macroeconomic imbalances beggars belief. The external deficit was 25 per cent of GDP in 2006 and 17 per cent in 2007. Gross short-term foreign debt amounted to 15 times the value of the central banks foreign exchange reserves at the end of 2007, or roughly 200 per cent of GDP. Gross long-term foreign debt amounted to another 350 per cent of GDP. Bank assets swelled to 10 times GDP by the end of 2007. These imbalances are the other side of the Icelandic purchases of companies in Britain, Denmark and elsewhere.

How could such a minnow exercise so much leverage? The answer starts before 2000, when most of the banks were still publicly owned and run like government departments. Real interest rates were low and even negative for long periods. Facing excess demand for credit, the banks operated like political patrons, allocating credit to favoured business clients. The resulting inefficiencies in resource allocation were offset by ever-rising amounts of debt relative to equity and by the longest hours of work in western Europe. These factors helped Iceland to become one of the most prosperous countries in the world in terms of per capita income and several indicators of quality of life.

The banks were privatised around 2000 in a hasty and politically driven process. Ownership went to people with close connections to the parties in the conservative coalition government, which had scant experience in modern banking. The central bank and the finance ministry were staffed at the top by people who preferred as light a regulatory touch as possible.

The banks soon extended their operations from commercial banking to investment banking. Neither they nor the regulators separated the implicit guarantees they received as commercial banks from their operations as investment banks. The extension of the safety net allowed them to take big bets at home and abroad. They operated like hedge funds, financing their expansion largely from foreign borrowings rather than domestic deposits.

The central bank tied its own hands so as to leave only the interest rate as its control instrument. It gave up reserve requirements on grounds that the banks did not want them; and it also failed to exercise moral suasion. Its efforts to restrain inflation by raising short-term rates (to 15 per cent by 2008) had the effect of sucking in more “carry trade” capital, undermining the intended curbing of demand and leading the krona to appreciate despite the huge external deficit.

During the 2000s, Icelandic companies and households have taken to borrowing as though there is no tomorrow. Now Icelands external liabilities swamp the central banks ability to act as lender of last resort, and other Nordic central banks have felt obliged to offer support lest an Icelandic implosion blow a hole in their own banking systems.

The “great unwind” currently under way is the result of the excesses built up in this framework of light regulation – itself the product of hasty, though overdue, privatisation. Now the new coalition government itself is in deep trouble. Rumours swirl that the second largest party, the Social Democrats, which came into government in the elections of May 2007 for the first time in 14 years, may end its coalition with the biggest party, the conservative Independence party, precipitating new elections. Opinion polls suggest that the Independence party would be likely to suffer a big loss and the Social Democratic party, its reputation less tarnished by the financial crisis, could get enough support to form a new government with one of the smaller parties.

That could signal a welcome change of direction in Icelands economic policy towards a more Scandinavian model, where finance does not rule the economy and macroeconomic imbalances are taken seriously.