New School Economic Review

93% of Icelandic voters refuse to pay back loan

by Benjamin on March 7, 2010

This morning, Icelands voters said no thank you to the compromise between their government and the Anglo-Dutch claim for recompensation after the collapse of Landsbanki and the ICEsave scheme they ran, where British and Dutch people had saved a hefty $5.3bn. Reading that back, it seems unfair that the people of Britain and the Netherlands should not be compensated, but there is a rather important detail which is missed by the usual commentary on this. This money was not saved. It was invested. The people who chose to send their money to Iceland, did so as a calculated investment decision. In the UK that happened via a savings account with Landsbanki or putting your money into bonds or ISA’s.  The return was high while the perceived risk of an ISA – promoted by tax incentives from the UK government – was low.

But then Landsbanki went bankrupt and their English and Dutch branches shut down, unable to repay deposits, the host governments went for the Icelandic government’s jugular - demanding the repayment of all UK/Dutch money held in the banks. Two things strike me: 1. If you put your money into an ISA or bond with a foreign bank, you are an investor. If the investment doesn’t pay off, you lose. Why should the Icelandic population bear the cost of your bad investment choice? (They’re already paying for their own bad choices). If anyone is wondering why the Icelandic people voted NO to a $16,400 debt per capita yesterday, I think it was not just the amount of money. It was about not re-compensating bad investment choices by relatively richer foreigners. By the way, in the UK, the minimum deposits/investments ranged from $10,000-$50,000, which investors could deposit tax free – this is not a domestic savings account for the low income person. 2: If a bank goes bankrupt, it is the host governments responsibility to insure against deposits being forfeited, even when that bank is foreign – although one would expect some guarantees to have been lodged with the central bank prior to the banking license being issued. That leaves the buck with the UK and Dutch governments, not the Icelandic one. Not a pleasant prospect in this day of growing government deficits.

That last part is where the argument is now centered. But the fact remains that a large proportion of the money lost in the Landsbanki collapse were investments into bonds and ISA’s. Investments always have some risk, and I’m sure there isn’t the same outcry of government support for those people who lost money on the Icelandic bond or stock market. Why not? Because I think we’ve confused an investment for saving. Which is an easy mistake to make, they are supposed to equal after all.

Private Bank Debt higher than GDP

by Benjamin on February 2, 2009

Now here’s some statistics which should be cause for concern…The G10 country doing the best in terms of banking liabilities as a percentage of GDP is the U.S….. with only a hundred odd percent of liabilities. That is the best performer, and that is after all the bail-out fun!

Belgium, Ireland, Switzerland, the Netherlands and the UK all have more than 3 times their GDP in private bank liabilities. Unsure where this might lead to, it is at least better than the original figure which put Ireland at a staggering 800% liabilities to GDP – although it turned out that Dresdner Kleinwort – the German consulting company – who had originally composed the chart had fallen prey to a bit of global risk themselves as they corrected the graphs with the comment

“I’m afraid to say, It looks like our outsourcing guys in Manila used the wrong exchange rate in compiling the data for Ireland. I’ve re-checked the figures and the number for Ireland is 368%.” (Financial Times)

Ignoring Manila’s fun at the FT’s expense, this calculation doesn’t start to count the government deficits or trade deficits, so with that is mind the picture is even less cheerful. An interesting question is of course whether the G10 countries have always been this heavily leveraged?

This via Turbulence Ahead and Stephen Kinsella‘s blog.