Iceland, You Won’t Believe It

Capitalist Exploits's picture

By Chris at

Market dislocations occur when financial markets, operating under stressful conditions, experience large widespread asset mispricing.

Welcome to this week’s edition of “World Out Of Whack” where every Wednesday we take time out of our day to laugh, poke fun at and present to you absurdity in global financial markets in all its glorious insanity.

While we enjoy a good laugh, the truth is that the first step to protecting ourselves from losses is to protect ourselves from ignorance. Think of the “World Out Of Whack” as your double thick armour plated side impact protection system in a financial world littered with drunk drivers.

Selfishly we also know that the biggest (and often the fastest) returns come from asymmetric market moves. But, in order to identify these moves we must first identify where they live.

Occasionally we find opportunities where we can buy (or sell) assets for mere cents on the dollar – because, after all, we are capitalists.

In this week's edition of the WOW: Iceland

The developed world is going to hell and probably deserves it. Today, I'm going to show you what should have been done both during and post the GFC. That it wasn't, and now almost certainly won't, is a problem for us all but that's a story for another day.

Today, we look to Iceland and marvel at what they managed to accomplish both leading into the GFC and then coming out of it, and then we scratch our heads at the latest news just out from their central bank.

On with it then...

It was over a decade ago now when I very nearly took a flight to Reykjavik but at the last minute opted instead to go to Copenhagen, which I regret since I'm told it's like Scotland on steroids (sounds like a blast). What clinched the decision in the end was that a scotch was about 3 times the price in Reykjavik, and since I was heading out for a wild boys week this was important in our considerations, though I'm told that in the land of fire and ice the women are indeed unbelievable.

Its history is that of an arctic backwater reliant on fishing fishing, energy, aluminium smelting, and tourism. A place with hardy living conditions and hardier people.

Between the late 90's and 2008 they, however, went through what can only be described as a stratospheric rise from this backwater specialising in fishing to one which specialised in global finance.

Using the Irish financial model as a blueprint, Iceland decided to revamp its economy repositioning itself in the international community as a low-tax jurisdiction for foreign finance and investment.

Iceland’s big three banks - Glitnir, Landsbanki, and Kaupthing - grew exponentially as deposit rates in the teens meant investors could borrow in foreign currencies such as sterling, euro, and dollars and earn a significant spread on the yield differential investing in various bond issues from the Icelandic banks.

The influx of capital had the effect of pushing the Icelandic krona into the stratosphere, rising 900% between 1994 and 2008. So not only did investors make a massive spread on the yield differential but the capital appreciation on their investment alone was huge. A lot of people made a lot of money.

As so often happens when money is easy, banks went on a debt fuelled buying spree acquiring international assets and commencing outlandish developments such as the Harpa concert hall funded by Landsbanki and touted at the time as Europe's largest glass building.

Harpa Concert Hall, Iceland

Things got so crazy that by the time the collapse came, triggered by the Lehman bankruptcy, Iceland's banking system held assets worth 10 times that of the entire country's GDP.

And THAT fact is, I believe, why today Iceland is faring relatively well.

Let me explain...

Too Big to Bail Out

The fact of the matter is that the banks were actually just far too big to bail out. Even if the Icelandic government had wanted to, they simply couldn't bail them out... and so they didn't. The CBI couldn't possibly be the lender of last resort for a banking system ten times the country's GDP and spread over many countries.

There was a lot of angst at the time and depositors lost their money. In an amusing side story Alistair Darling, then chancellor of the exchequer in the UK, used anti-terrorism powers to freeze Landsbanki’s UK assets.

I mention this just in case you've ever mistakenly thought that governments would never do such a thing to the private assets of a private institution from another country. You know... in a developed world country where the rule of law is, ahem, "sacrosanct".

In any event, there are 3 key aspects to why Iceland is today doing relatively well today:

1. They let their largest banks fail, and with it the stock market went from "oh my God, are you kidding me" expensive to "dear mother of Mary" cheap.

2. They let their currency collapse. Within days of letting the banks collapse, the krona (graph below) collapsed and over 80 percent of the financial system blew away in the Icelandic wind and almost all businesses on the island went belly up.

The stock market shown in the graph above fell by over 95 percent and interest payments on loans exceeded 300%. Whoopee! Can you imagine locking in a yield on a debt instrument at 300%? Over 60 percent of bank assets were written off within a few months after the banks collapsed and interest rates hit 18 percent in order to curb inflation.

3. And then they imposed capital controls

Pretty much all the things that every government economist said "shouldn't" be done they did.

In between all of this they threw out the government in what was called the "pots and pans revolution".

Now, I suspect Paul Krugman will disagree here as what I'm going to suggest is both fact as well as common sense, a prerequisite if ever there was one for a conflict with Krugman's ideas.

This is not my opinion. This is fact. This happened. Sure, there was the typical government doing the typical stupid things like trying to bail out smaller banks and such but in principal the system cleared.

Fast forward today and Iceland has come out the other side and here is what it looks like.

Unemployment rates after just 12 to 18 months began falling and haven't looked back.

While Iceland let their banks fail they did take on loans from the IMF and others, which saw government debt explode higher (they took on about $10bn in debt - roughly the size of the country's GDP).

And while I can't say I agree with them doing so, the fact is that almost a decade later their debts are increasingly under control and falling relative to GDP. Why? Because the private sector was allowed to begin to grow again from a stable (un-indebted) base.

The economy has been growing steadily and is now the envy of their European cousins.

In large part Iceland let the system clear. They did so because they were forced to. I'm pretty sure that if they'd had the ability to bail out the largest banks and follow all the failed policies the rest of the developed world seems intent on doing, they would have. I'm just glad they didn't, and today, I suspect most Icelanders would agree.

It's not a perfect setup but it's starkly different to how Western governments have dealt with the crisis and the results are telling.

So Here is the Question...

Having a free floating currency and watching it collapse 80% acted as an immediate release valve for Iceland. I'm not sure their central bank understands this. It appears not since they subsequently imposed capital controls, which was like locking the barn door after Flicker had already made it off into the starry night.

The other reason they seem not have understood its significance is because of this...

According to this article, they are now looking at pegging their currency to the euro.

"Iceland is considering pegging its crown to a major currency, most likely the euro, its finance minister said on Saturday, amid concerns the small North Atlantic nation's economy risks overheating."

Pray tell, what jumping onto the deck of the Titanic hours before the band stops playing is meant to do for these fine folks?

What they're looking for is an anchor of stability. Given that Iceland has no people and imports most everything except fish and sheep, they're always going to have a currency that is susceptible to the gyrations of those commodities. Pegging currencies is plain stupid. All pegs eventually break.. They'd be better of pegging the krona to myrrh.

Let's play a hypothetical game and pretend you're in charge of the CBI... 

Iceland Poll

Cast your vote here and also see what others would do

- Chris

“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 GDP.” ? Michael Lewis, Boomerang: Travels in the New Third World


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Sudden Debt's picture

They shouldn't peg their currency to other currencies.

They should increase their taxes a bit and use the proceeds to buy goldreserves for the country.

Use taxes to store wealth when the economy is doing great.

Lower taxes when the economy is slowing.


Richard Chesler's picture


honest injun's picture

Two years ago, I visited Iceland.  Hiking a volcano that was active a few years earlier caused my hiking shoes to fall apart.  I looked for a replacement but found that shoes cost 3 to 4 times as much as in the US.  I couldn't figure out why this was so.  I waited to get back home before I bought new shoes.  I recommend going to Iceland, if you want to eat whale meat.

Apeon's picture

I doubt that you are an Injun, or Honest.

gaoptimize's picture

I'd go for the fish tacos ;)

Honest Sam's picture's not "Flicker".   It's "Flicka".    Just sayin.......

whoisjg's picture

One thing that Iceland did right, was when the banks failed, the people were just given ownership of their houses. In america, the bankers got 20 trillion and the house owners became working poor debt slaves. America is a piece of shit. I'm sorry it is. 

UndertheDRADIS's picture

It occurred to me that if the underlying loans were paid than the derivatives would vaporize.

Slomotrainwreck's picture

Sorry man, I keep banging the UP arrow bit can't get it to go any higher than 2.

Chupacabra-322's picture

No worries.

I just multiplied that post to the 10th Power.

I've come to the conclusion, that we're are Governed by Children & Psychopaths.

And, these Psychopaths Goals are to get everyone, or at least most of us Killed.

Syria yesterday proved that.

The open in your Face Criminality & absolutel complete Tyrannical Lawlessness is reigning Pure Evil HELL on Earth.

One of these is not like the others..'s picture

With you there.

I can't see any other explanation for the way things are.

Be in the world but not OF the world seems to work really well.

I think I tried every other approach first...

Know shit's picture

Let me guess, the jailed bankers where released some months ago?
(You have to get rid of them in a verry 'convincing' way to be sure....)

Take care.

Apeon's picture

Who Else Sent Bankers to Jail.??

political_proxy's picture

Will never happen in the Bankster run US. Banksters are free to do as they please, with impunity (like CONgress).

Kprime's picture

how can they not be?  The bankers own congress

Radical Marijuana's picture

Excellent article, which restated the points which I originally believed in, ... at that time.


However, one of the more important points was the relative degree of the


prevented the usual CIA kinds of divide and conquer tricks from working.

I believe that CIA types of operatives were sent to Iceland, BUT, FAILED.



Therefore, what Iceland "needs," according to international banksters,

is at least a hundred thousand refugees in order to make bail-outs work.

Apeon's picture

NOt going to happen-----my family rumor--[Icelandic]--was that Iceland was peopled by the Norwegians who did not want a King, and left NOrway when they finallly got one-----possible that they were also losers in the war.

They are somewhat Anti-Authoritarian

1.21 jigawatts's picture

Any talk of jubilee and (((they))) will scream "holocaust"

daveO's picture

Yep. I remember Jim Kramer predicting the island would become deserted after they let the banks go. Putz.

Peterman333's picture

they're kickass because they're half Irish from the time when Vikings took home Irish women as slaves, only a crazy @ss viking would take an Irish woman home. I can just see the Irish men on the shore yellinig to the viking longboats rowing away "good luck!'ll need it."

Apeon's picture

They also established the two largest Irish cities------and they did not need LUCK, they had Mocksee!!

Honest Sam's picture

Why couldn't the vikings have invaded Hungary, gawddamnit!!!

Able Ape's picture

Not surprising since everyone feels SO much better after a HUGE, colon-clearing shit....You don't have to go to an Ivy League school to realize that!

DC Beastie Boy's picture

and they jailed Banksters unlike you know who

WTFUD's picture

Too little too late, like the Chinese, they should've hung their Bankers and the Goldman visiting ones.

Hat's off to Iceland which overtook Norway last month as the highest payer for a Litre of Diesel at the pump @ $ equivalent, $1.74.

That's 260% higher than in the US & Russia, still only 16% above the UK.

The Cabal will fuck you over regardless of your resistance, unless we adopt China policies on them.

Apeon's picture

NOt a real $ drain----road system is minimal,  and then there is always a SheepSled.