Iceland offers risky temptation for Ireland as recession ends

Iceland has finally emerged from deep recession after allowing its currency to plunge and washing its hands of private bank debt, prompting an intense debate over whether Ireland might suffer less damage if it adopted the same strategy.

Iceland Winterfest - Alamy image

Ambrose Evans-Pritchard
Telegraph

The Nordic economy grew at 1.2pc in the third quarter and looks poised to rebound next year. It ends a gruelling slump caused largely by the "New Viking" antics of Landsbanki, Glitnir and Kaupthing, the trio of lenders that brought down Iceland's financial system in September 2008.

The economies of the two "over-banked" countries have both contracted by around 11pc of GDP, but Iceland has achieved it with inflation that devalues debt, while Ireland has done it under an EMU deflation regime that raises the burden of debt.


This has led to vastly different debt dynamics as they enter Year III of the drama. Iceland's budget deficit will be 6.3pc this year, and soon in surplus: Ireland's will be 12pc (32pc with bank bail-outs) and not much better next year.

The pain has been distributed very differently. Irish unemployment has reached 14.1pc, and is still rising. Iceland's peaked at 9.7pc and has since fallen to 7.3pc.

The International Monetary Fund said Iceland has turned the corner, praising Reykjavik for safeguarding its "valued Nordic social welfare model".

"In the event, the recession has proved shallower than expected, and Iceland’s growth decline of about minus 7pc in 2009 compares favorably against other countries hard hit by the crisis," said Mark Flanigan, the IMF's mission chief for the country.

Total debt will peak at 115pc, before dropping to 80pc by 2015 in what the IMF called "robust debt dynamics". Meanwhile. Ireland's debt will continue rising for another three years to 120pc of GDP. The contrast will be very stark by the middle of the decade. Iceland may have a lower sovereign debt than Germany by then.

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Nigel Farage: Why We Would be Better Off Out of This Chaos

Nigel Farage
UK Express

IS it time to leave the European Union, would we be Better Off Out? As the Daily Express courageously insists: Of course we would.

Over the last 20 years I have been promoting the very simple idea that our country would be doing itself, its people and the rest of the world a great favour by returning to self-governance. And this is why.

We would be Better Off Out financially by simply not paying the £48million a day to the European Union. This would be money better spent at home with priorities set by our elected representatives, rather than returned in part with European conditions.

We would be Better Off Out financially minus the dead weight of regulation that makes the life of our businesspeople a misery.

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Ireland's crisis flares as investors dump bonds

Shawn Pogatchnik
Associated Press

DUBLIN – Ireland's financial troubles loomed large Wednesday as investors — betting that the country soon could join Greece in seeking a bailout from the European Union — drove the interest rate on the country's 10-year borrowing to a new high.

The yield, or interest rate, on 10-year bonds rose above 8 percent for the first time since the launch of the euro, the European Union's common currency, 11 years ago.

Bond traders increasingly believe that Ireland soon will be forced to tap Europe's emergency fund for euro-zone nations facing a threat of bankruptcy. The 16 nations of the euro zone created that euro750 billion backstop in May as the EU and International Monetary Fund provided an emergency euro110 billion loan to Greece.


Another bailout would send more shock waves through the currency union, which has struggled to find ways to keep individual governments from overspending and threatening the currency's value.

Flaring financial tensions has driven the euro off recent 6-month highs of $1.428 versus the dollar. The euro was trading Wednesday at $1.3760, down from its opening of $1.3773.

The cost of funding Irish debt has risen steadily since September, when the government admitted its bailout of five banks would cost at least euro45 billion, equivalent to euro10,000 for every man, woman and child in Ireland. That gargantuan bill, in turn, has made the projected 2010 deficit rise to 32 percent of GDP, the highest in post-war Europe.

The yield on 10-year Irish notes rose steadily from 7.94 percent and passed 8.4 percent in afternoon trade. As the value of bonds fall, buyers demand ever-higher yields as compensation.

Traders accelerated their offloading of Irish bonds after London-based LCH.Clearnet Group announced Wednesday it would require clients who deal in Irish bonds to increase the percentage of cash deposited up front to 21 percent, compared to a usual deposit of less than 6 percent. The move came on top of decisions this month by the governments of Russia and Chile to stop buying Irish debt.

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TARP is Done, but Count on Sequels

Gretchen Morgenson
NY Times

THE government is pulling a sheet over TARP, the Troubled Asset Relief Program created during the panic of 2008 to bail out the nation’s financial institutions. With the program’s expiration on Sunday, we can expect to hear lots of claims from the folks at the Treasury that it was a great success.

Such assertions would be no surprise from a political class justifiably concerned about possible taxpayer unhappiness, the continuing economic turmoil and the midterm elections. But if we have learned anything during this crisis, it is that the proclamations emanating from the Washington spin machine must be taken with an extra-hefty grain of salt.

Consider the claims made last summer that the Dodd-Frank financial reform act reduces the threats that large, interconnected banks pose to taxpayers and the economy when the banks are deemed too big to fail. Indeed, as regulators hammer out the rules governing derivatives transactions, it’s evident that the law has created a new set of institutions that will almost certainly be deemed too important to fail if they ever get into trouble. And that means there won’t really be an effective way to keep those firms from taking big, profitable, short-term risks that are dumped on the taxpayers when the bets fail.

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