“The current situation of Iceland is worse than any recession that any nation has had to endure since the Great Depression.”
The consultants at Oliver Wyman who have been looking into the assets of the failed Icelandic banks make no bones about it. Morgunbladid has published extracts from their memo to the Icelandic government from this January where 40% of the banks’ loans were deemed to be bad. Bad loans are ones made to companies that have been unable to pay for more than 90 days. In the three months since, the situation has only gotten worse.
Most of the loans are to operating businesses, as most of the loans to holding companies and investment vehicles were left in the ruins of the old banks. Only a third of the loans can be described as good, according to the memo.
The Icelandic crisis is the worst that has hit any country for 80 years, evident when compared with bad loans during the banking-crisis’ endured by Thailand (33%), Korea (18%), Sweden (18%) and Norway (9%) in the last two decades.
Related posts:
AKJ
2 years ago
So who will pick up the bill for the party? The bill is too large to trade out for 150k workers (less unemployed) and Iceland does not have skills that others necessarily want. Time to join the EEc and eradicate the corruption and incompetence.
Vilhjalm
2 years ago
No one has to pay the bill. But Iceland has to hand over all assets in old banks to foreign creditors, and sooner or later most or all of all the assets in the new banks (other than deposits). Currently the Iceland government, through the old bank-new bank scheme, is resisting this process. However, the creditors are very upset about the attempt to shield assets within the new bank. The creditors will use the IMF and EU to force Iceland to hand over the new bank assets and will (probably) not accept something like a 49% minority share of the new banks.
So that means the foreign creditors will probably get fish quota income, energy and aluminum stream of income, home and real estate mortgages and their stream of income, and takeover loans to businesses and individuals.
Whatever assets are owned by the three banks, old and new.
The money will go to the big foreign creditors (such as the 20 billion euro german bondholders), who will take it out of the country, once they get rid of the currency controls.
Iceland only has to pay for its government expenditures and loan-servicing for Icesave, bonds, and IMF loans.
But how do you pay for the government when (apart from the collapse of the domestic economy) most of the income streams for the various assets are leaving the country in german suitcases?
Maybe through higher income tax, maybe by selling anything that remains in the ownership of the government (not much, as far as I can tell). Maybe piece-by-piece the airport, future hydroelectric rights, oil rights, the rest of the home mortgages.
The solution, as I have said before, is to modify the bankruptcy laws to the pre-1994 American code. The foreign creditors will get all the bank-owned assets and loans, but the businesses and homes all go into reorganization and bankruptcy, where the debts are modified, so the creditors end up holding an empty bag. If the government writes off debt, such as 20%, then that amount must be paid to the foreign creditors. But if the debts are wiped out in bankruptcy court, the debts disappear into the air.
Physchim62
2 years ago
It’s not just the worst banking crisis since the Great Depression – it’s off the scale! There is a handy report from the IMF written last September which gives details on systemic banking crises 1970–2007:
http://www.imf.org/external/pubs/ft/wp/2008/wp08224.pdf
The worst seems to have been in Indonesia in 1997, which had a fiscal cost of 56.8% of GDP. The fiscal cost of the Icelandic crisis is 75% of GDP and rising!