With the world's attention focused on the Greek tragedy taking place, you might have forgotten that there is also a success story taking place.
Icelanders who pelted parliament with rocks in 2009 demanding their leaders and bankers answer for the country’s economic and financial collapse are reaping the benefits of their anger.While the government of Greece is debating a fifth round of austerity measures and a bailout for foreign creditors that the Greek public doesn't want, it's long past time that we should be looking at other, more effective measures.
Since the end of 2008, the island’s banks have forgiven loans equivalent to 13 percent of gross domestic product, easing the debt burdens of more than a quarter of the population, according to a report published this month by the Icelandic Financial Services Association.
“You could safely say that Iceland holds the world record in household debt relief,” said Lars Christensen, chief emerging markets economist at Danske Bank A/S in Copenhagen. “Iceland followed the textbook example of what is required in a crisis. Any economist would agree with that.”
Iceland's economy grew 2.9% last year and is expected to grow 2.4% this year. Meanwhile the European economy has dropped into recession.
So why has Iceland succeeded while Greece has failed? Because Iceland put its people before foreign creditors.
The island’s households were helped by an agreement between the government and the banks, which are still partly controlled by the state, to forgive debt exceeding 110 percent of home values. On top of that, a Supreme Court ruling in June 2010 found loans indexed to foreign currencies were illegal, meaning households no longer need to cover krona losses.Iceland wrote off household debts worth 13% of GDP.
“The lesson to be learned from Iceland’s crisis is that if other countries think it’s necessary to write down debts, they should look at how successful the 110 percent agreement was here,” said Thorolfur Matthiasson, an economics professor at the University of Iceland in Reykjavik, in an interview. “It’s the broadest agreement that’s been undertaken.”
Without the relief, homeowners would have buckled under the weight of their loans after the ratio of debt to incomes surged to 240 percent in 2008, Matthiasson said.
Note those were household debts. Not bank debts or creditor debts.
It's not just Greece that can learn a lesson from Iceland. So can Washington.
Instead of covering up for banker misdeeds, Iceland has prosecuted the crooks.
Imagine that. Bank CEO's sitting in solitary confinement in prison, instead of buying off corrupt politicians and living in mansions.
The authorities are now investigating most of the main protagonists of the banking meltdown.
Iceland’s special prosecutor has said it may indict as many as 90 people, while more than 200, including the former chief executives at the three biggest banks, face criminal charges.
Larus Welding, the former CEO of Glitnir Bank hf, once Iceland’s second biggest, was indicted in December for granting illegal loans and is now waiting to stand trial. The former CEO of Landsbanki Islands hf, Sigurjon Arnason, has endured stints of solitary confinement as his criminal investigation continues.
That compares with the U.S., where no top bank executives have faced criminal prosecution for their roles in the subprime mortgage meltdown.
What's more, Iceland's Parliament is still considering whether to bring an indictment against then Prime Minister Geir Haarde for his role in the crisis.
That's like Congress indicting President Bush or Hank Paulson for their role in the crisis.
Greece has much more to lose by not standing up to the bankers.
When Wolfgang Schäuble proposed that Greece should postpone its elections as a condition for further help, I knew that the game would soon be up. We are at the point where success is no longer compatible with democracy. The German finance minister wants to prevent a “wrong” democratic choice.It's one thing for foreign creditors to manage a country's policies. It's another for them to simply tell a nation to suspend elections.
Democracy is now taking a backseat to the wishes of bankers.
Let's not kid ourselves: the latest proposed bailout of Greece would only drop their debt levels to 129% of GDP. That's far above sustainable levels. Thus another bailout, or a default would still be unavoidable.
Of course, Greece is not exactly like Iceland.
Greece is locked in a currency exchange that Iceland never was. Greece's situation is different, but similar to something we've seen before.
Let me set the scene: an increasingly discredited economic policy approach gives rise to growing domestic social and political opposition, street protests and violence, disagreements among official creditors, and mounting concerns among private creditors about a disorderly default. In the midst of all of this, national leaders commit to more of the same harsh austerity measures that they have been unable to implement for two years.This could be a description of Greece in 2012, but instead we are talking about Argentina in 2001.
Many people forget that Argentina played the exact same game with the IMF that Greece is now. Argentina tried austerity measures too. For instance:
2000Some like to point out that Argentina's unemployment rate soared to 21% shortly after the default, but they usually fail to mention that the unemployment rate was already 18.3% before the default (a slightly lower level than Greece is currently experiencing).
May 29 Argentina announces £649m in spending cuts, and two days later 20,000 protesters take to the streets against the cuts.
March Mr Machinea resigns as economy minister on March 2. Ricardo Lopez Murphy succeeds him and two weeks later unveils a tough £3bn two-year austerity program with severe cuts in education.
July 30 The government's key austerity bill is passed. A "zero deficit" law aims to end deficit spending and slash state salaries and some pensions by up to 13%.
December 17 Government presents 2002 budget, which includes spending cuts of nearly 20%.
Like Iceland's experience, Argentina's economy has grown nearly uninterrupted since shortly after the default, averaging about 7% growth for the nine years, making it one the fastest growing economies in the world. This flies in the face of predictions of disaster from default.
Doubters point out that Argentina is self-sufficient in food production while Greece isn't. Thus some talk about famines and starvation if Greece defaults. Of course, many of those same people said the same thing about Iceland. The Great Iceland Famine never seemed to have happened.
Doubters point out that Argentina has run a trade surplus for years, while Greece has run a trade deficit. Those doubters have forgotten that Argentina was running a trade deficit shortly before the default because its over-valued currency was pricing it out of export markets, just like Greece today.
I don't know about you, but I've gotten pretty sick of predictions of doom if we do what we know is right.
If we don't invade Iraq we will see mushroom clouds over New York.
If we don't support a murderous, overseas dictator something worse will take his place.
If we don't give up our civil rights the terrorists will attack.
If we break up the crooked banks and throw the bankers in jail it will cause chaos in the financial markets.
If we raise taxes on the rich they won't hire us for increasingly shittier jobs.
If we default on unpayable debts it will cause famines.
If we don't vote for the lesser of evils then a worse guy will win.
Here's another prediction: if we don't do what we know is right then we are allowing ourselves to be led down the path to Hell.