Greek tragedy vs. Icelandic saga
(CNN) – Greece may be known for its tragedies and Iceland famous for its sagas but recent history tells us these stories may turn out to have very different endings–from an economic point of view at least.
In October 2008, Iceland became one of the earliest victims of a credit crunch whose ugly effects many Europeans are still living with today.
The North Atlantic island was the first entire country to almost go under, sunk by the weight of a banking sector whose debts amounted to more than six times Iceland’s entire economy.
However, three years on, Iceland is poised to re-emerge from economic purgatory.
The Organization for Economic Co-operation and Development not only expects the country to return to growth but to put on a performance which would make many of its European neighbors envious.
The OECD’s latest estimate sees Iceland expanding a healthy 2.4% for 2012.
So, as the Greeks endure an endless cycle of austerity and (quite rightfully) fret about their future, how does their predicament today stack up with Iceland’s uncertain times at the end of the last decade?
Tough talk vs. tough actions
Things were harsh for Iceland in 2008, as I remember first hand, having been promptly dispatched to its cold climes after the nation’s broken banks were swiftly nationalized.
I remember standing on a frozen lake outside Iceland’s ancient parliament – the Althing – as the chiefs of the stock exchange and central bank, one after another, battled furiously to prevent the foreign cash on which their island depended from fleeing its shores.
Iceland’s winter of discontent was closing in, but the money was flowing out like water.
The country became embroiled in a diplomatic spat with its neighbors –such as the UK and the Netherlands– amid concerns no one would get their money back and emerging markets – like Russia – predictably made their usual empty promises of financial support.
In the end, as so often is the case, the knight in shining armor rode in to save the day in the form of the International Monetary Fund, bearing a $2.1 billion bailout.
Hefty conditions were requested and there was much squabbling about the rate of interest.
So far, so familiar…
Public debt vs. private debt
Yet Iceland and Greece do not offer an easy comparison.
What is more: many of the solutions available to the former are not applicable to the latter – because of its size and political and monetary affiliations.
True, Iceland’s unemployment skyrocketed to a record of 7.6% at the height of its crisis but that still pales in comparison to the 21% we see in Greece today. And the 320,000 people living in Iceland’s is but a fraction of the population of Greece with nearly 11 million people.
What is also different between the two scenarios is a different proportion of public borrowings.
Prior to propping up its overburdened lenders, Iceland was not a country known for its big sovereign obligations.
Greece, by contrast, has arrived at today’s scary 160 percent debt-to-GDP ratio, and will be lucky if it reaches its target of 120.5 % by 2020 in accordance with the terms of its second bailout.
Eurozone, or ‘no Euros’ zone?
Back when Iceland nearly went broke, I remember its fishermen openly extolled the euro’s virtues.
Families with euro mortgages faced crippling monthly payments. To them, adopting the single currency would have been a blessing.
Years later, the OECD still reckons a eurozone entry for Iceland would be a good idea.
I’m not so sure.
Had Iceland been part of the monetary union, it wouldn’t have been able to inflate its way out of its debt mountain and devalue its currency. These tactics are often employed by struggling economies to press the reset button. Mind you, they are not open to eurozone members.
Some say Iceland’s policy response was ‘textbook stuff’ in terms of its speed and efficacy.
Barely two weeks after the country’s crisis erupted, its central bank slashed rates to 3.5% from a record of 15.5%.
A month after that, inflation had also reached a record: 17.1%.
A shock, certainly, but a relatively brief one at least when stacked up against Greece’s longtime languishing.
Greece enjoys the mixed fortunes of being tied to other eurozone members that are rich enough to help zero its credit card whilst being stuck with the wrong monetary policy: one designed to keep price rises at or around 2%.
That’s way below where Greece should be given its current predicament.
Though Iceland, like Greece, may be a republic these days the Icelanders’ currency – the Crown– may have turned out to be their saving grace.
Capital flight vs. Capital controls
Iceland’s money is now worth half what it was before 2008.
And though that does make the country’s exports more competitive, the sudden plunge in its value required brusque action at the time.
In 2008 foreign assets took flight and Iceland’s money dropped like a stone.
To stem the tide, authorities swiftly imposed capital controls, designed to safeguard what was left following the banking sector’s implosion.
Non-Icelanders were told the government would not automatically recompense them, prompting roars of outrage similar to when Greece’s investors were told to kiss goodbye to more than half of their holdings last year.
Yet Iceland did deal with its financial demons to some extent in its own way without seeing its sovereignty threatened.
Greece, on the other hand, must publicly swallow its medicine or face going without dinner.
The result: Iceland was relegated to junk bond status but even in the depths of its depression the country never actually defaulted on its debts. Its financial sector problems were ring fenced and it was able to put its people first and deal with its creditors later.
That’s something to consider as Greek bonds are cut to ‘selective default’ by Standard & Poor’s.
Iceland, on the other hand regained its investment grade from Fitch two weeks ago.