The Secret Sauce Of Iceland's Success Story: Debt Liquidation?

Tyler Durden's picture

That Iceland is so far the only success story in the continent of Europe, which continues sliding into an ever deeper depressionary black hole, as a result of the complete destruction of its financial sector and its subsequent rise from the ashes, is by known to most. What is still not exactly clear is what conditions have allowed success and growth to flourish in a barren wasteland where 60% youth unemployment is increasingly the norm, and where economic "outperformance" is measured in shades of red. As it turns out, perhaps the biggest jolt to Icelandic economic growth is what we said was the correct prescription for resolving not only the US but global growth malaise that struck in 2008: debt liquidation.

Of course, instead the powers that be opted for merely masking unsustainable debt with more debt in the hope of preserving the global financial equity tranche, where some $50 trillion, or two-thirds of total, in US household wealth is concentrated, by drowning out hundreds of trillions in global debt through controlled debt inflation - which four years later still has yet to take hold, and which  with every incremental dollar, yen, franc or pound printed threatens to spillover into uncontrolled hyperinflation, i.e., loss of fiath.

Alas, no debt liquidation is possible without making the equity below it worthless: a fact of restructuring known all to well to most which is precisely why it will not happen as long as the status quo is in control. Yet in those places which dared to bite the bullet and do the right thing - namely liquidate untenable debt - growth is back, and the future is truly bright without everyone asking "just how much longer will a few Keynesian voodoo acolytes provide a reprieve from the poverty effect?."

From Bloomberg:

Iceland’s lenders have forgiven household debt equal to about 12.4 percent of gross domestic product since the island’s 2008 financial collapse.


Lenders had written off 212.2 billion kronur ($1.7 billion) in household debt through the end of 2012, the Icelandic Financial Services Association said in a letter to parliament. The group estimated a further 35.3 billion kronur will be forgiven this year after they recalculate loan agreements to meet a Supreme Court ruling.


About 141.2 billion kronur of that follows a ruling from the island’s top court stating that mortgage loans indexed to foreign exchange rates were illegal, it said.


The island’s biggest banks failed in October 2008, after defaulting on about $85 billion in debt. The collapse plunged the island’s economy into a crisis that sent unemployment surging nine-fold and triggered a recession.


The association said that of the total, 45.8 billion kronur in private debt was forgiven as part of an agreement that stipulated that debts exceeding 110 percent of a property’s value must be written off.

What a novel concept: debt slaves succeeding in, one day at a time, removing their shackles. Or at least being aware of their debt serf status: which sadly is much more than one can say about 99% of the remainder of the world's population.

That said, look for debt liquidation to be tried everywhere else eventually... But only after every other mechanism of "inflating" away the debt has failed, and in the process also wiped out not only the global middle class, but the myth of the welfare state.

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JLee2027's picture

Full reset is the only solution.

The Shootist's picture

Kyle Bass isn't convinced they had all their medicine yet...

TheTmfreak's picture

I'm actually VERY surprised Zerohedge hasn't addressed this statement. After hearing Kyle Bass say what he's said... I go... ok where the fuck is that covered? Nowhere?

Fish Gone Bad's picture

Kyle called Iceland a roach motel.  Money goes in and does not come out.  He went as far as to say he is STILL worried about Iceland.  Iceland may have given the finger to some of its problems, but they are far from healed.

e-recep's picture

he sounds like a burnt investor.

Azannoth's picture

They still cling to their socialism, they just gave capitalism the middle finger, this will help short term but will come around in a few years with a vengance

Flakmeister's picture

This is too funny... Obviously what you think socialism and capitalism are are very different from what are standard accepted definitions....

James_Cole's picture

what we said was the correct prescription for resolving not only the US but global growth malaise that struck in 2008: debt liquidation.

Yeah, that'll go over really well with the JPM Congress and the corporate media. 

Take about ten seconds for PR firms to whip the people into a frenzy over debt liquidation being the work of satan. 

Fish Gone Bad's picture

Debt forgiveness will cause a currency to collapse.

Hail Spode's picture

Unless that currency is also money (that is to say, gold or silver).

Room 101's picture

And after the currency collapses anyway, then what?   

IBelieveInMagic's picture

Therein lies the problem. Why should the US go down the path of debt forgiveness and lose reserve currency status! It is an unbelieveable privilege that any rational person will be loathe to give up...

prains's picture

still don't know;


how did iceland keep the lights on during the transition/reset?

who paid the bill while everyone else there was trying to find a floor in value?


I like the Iceland story I just wanna know who was the sugar daddy while they "figured it out"....

honest question

James_Cole's picture


Also, Iceland has 300k people and a tiny GDP so...

Oh and as far as the lights, their energy is local green so the lights would probably stay on no matter what. 

prains's picture

being Vikings probably didn't hurt either

James_Cole's picture

That's a very amusing article about what happened according to Lewis, cause doutrage in Iceland. 

I'm sure the whole thing is online somewhere, it's quite funny though maybe or maybe not accurate. 

falak pema's picture

SO why hasn't the political world imposed this on the financial world and cleaned out the debt pile via a debt jubliee...?

Back in 2009 they said : IMPOSSIBLE to save their own skins.

And those cronies all bought it.

And started pumping ZIRP/QE and socialising private debt on all continents via govt B/S. 


Herd Redirection Committee's picture

Debt jubilee, end of story.

Don't worry, the younger generation won't have any qualms about defaulting on prior 'commitments'.

Room 101's picture

+1.  Debt repudiation is not a matter of "if", it's a matter of "when."

JFKFC's picture

Pay the $400 million to buy ourselves out of the FED & claim odious debt.
It really is that easy. Sadly, TPTB would never go for that.

Cyclerider's picture

While you're at it, why not liquidate all the government's debt, too.  100% haircuts for all those who loaned money to their governments.  In the future nobody will care how much debt they run up, including governments.  At some point they'll be able to just wipe the slate clean and start borrowing again.

MsCreant's picture

Unless there is no lender...

neidermeyer's picture

MsCreant I'd give you 1000 "thumbs up" for that if I could.

Room 101's picture

Exactly.  Although history has shown that once a government defaults, they can borrow again in a few years time.  But in the mean time, you've hopefully changed some habits. 

RaceToTheBottom's picture

What, you mean that the US has lenders!!!!!!!?????

Almost 100% of mortgages in the US are US Government mortgages!!!!!!  What do you think that US bankers will do?  Start the next google or FB????  Mortgages are all they Fucking know and even that is WORLDCLASS Poorly done.  They would be doing the exact same thing as now maybe without a few criminal intermediaries....

We have bailed out the banksters like no other country in HISTORY and we still have NO REAL LENDERS. 

Flakmeister's picture

Absolutely, but a "small" player can do it without bringing the house down. It gets a lot tougher as you climb up the food chain...

MsCreant's picture

There is no way to do it without bringing the house down. 

Flakmeister's picture

Yes and no. We both agree that something will give eventually. Obligations will be defaulted on.

I firmly believe that if the US had eschewed TARP and adopted the Swedish Solution (look up their banking crises in the early 90's) that time could have been bought. Fat chance of that happening....

The other thing that Iceland got right is that every single fucker running those banks is now facing a trial...

among many other links....

RaceToTheBottom's picture

As opposed to what we have now?

MsCreant's picture

Much of the debt was created with fraud. Fraud invalidates any so called "contract." I am debt free, but I still say Fuck em'. You cheat, you lose. Fuckers!

knukles's picture

Fraudulent Conveyance...



MsCreant's picture

Thanks, I always forget that term. I have been screaming this one, and you have been helping me out, for years now! Nice to have good neighbors around who know you!!


neidermeyer's picture

AMEN , Fraud is the only term you need to remember when speaking of 98%+ of mortgages issued between 1998 and 2007 ... There is no security for any loan ,, hell ... in most cases no loan was actually made ,, just a changing of the terms on collection accounts.


Let the TBTF's fail ... save the country.

bank guy in Brussels's picture

In previous ZeroHedge articles re Iceland, this was the key factor:

« ... the safeguarding of a welfare system that shielded the unemployed from penury ... »

Government welfare arrangements for the most vulnerable in Iceland were actually INCREASED in the darkest hours of the collapse:

« On Nov 3rd 2011, the IMF issued the verdict on its 3-year adjustment program for Iceland. The IMF’s verdict was that its “program for Iceland was a success” due to 4 factors:

1. the decision not to make taxpayers liable for bank losses.
2. the decision not to tighten fiscal policy during the first year of the IMF program.
3. preservation and even strengthening of Iceland’s welfare state during the crisis.
4. prudent use of capital controls. The IMF said: "capital controls were necessary and are now seen as useful addition to policy toolkit". »

Stimulati's picture

i.e. Keynesian

Not the Montarism the rest of the world is doing that you folks have deluded yourselves into calling Keynesian

kennard's picture

Milton Friedman said, in the early Sixties, that the Fed should have bought U.S. Treasuries in 1930 through 1932 to stimulate demand. In 2002, Bernanke told Friedman that "you were right" about that. Then 2009 came along and Bernanke did what Friedman had recommended.

Monetarism is just another tool for the government to distort economic signals and prevent price discovery, just as Keynes' fiscal tools, used incorrectly, lengthened the Great Depression.

We should be reading von Mises, not Friedman.

knukles's picture

They paid their way out of debt selling the Japanese glacier ice cubes.
Oh wait.  That's so 80's 

kaiserhoff's picture

Better business plan than faceplant.

If you write the prospectus, I'll sell the IPO;)

Bangin7GramRocks's picture

Oh how cute! But isn't it like comparing what Sara Barracuda did in Wasilla to New York City?

Debeachesand Jerseyshores's picture

Fat chance that happening in America.

Scro's picture

The secret sauce is thousand islands dressing.

Paracelsus's picture

You forgot to mention:

a) Only nation to jail a few bankers,even if short term.

b) Highest proportion of Land Rover ownership (Okay,Range Rover!).

c) Geothermal heating for homes and business.

d) Western (NATO) reluctance to strong-arm this country due to strategic location.

e) One of few nations to have two public referendums on assumption of private bank debts.Twice the Icelandic people have rejected this honor.

f) Sons and daughters of Vikings with long cultural traditions of independence.Oldest functioning parliament in Europe.

knukles's picture

g)  Hot mommas.

h)  Nobody took Bjork as collateral

Fish Gone Bad's picture

a. Only nation to jail a few bankers,even if short term.

Bill Clinton jailed some 300 banksters in the S&L crisis.   Andrew Jackson destroyed the central bank and it took something like 75 years for the beast to come back from the dead.