07 December 2010

Iceland Out of Recession

Unlike Portugal, Ireland, Greece, and Spain, the PIGS, Iceland has a currency, which it has allowed to devalue, and it has largely defaulted on its banks debts, though its government had to be dragged into this kicking and screaming through a plebiscite, but now Iceland's economy grew sharply in the 3rd quarter:
Iceland's decision two years ago to force bondholders to pay for the banking system's collapse appeared to pay off after official figures showed the country exited recession in the third quarter.

The Icelandic economy, which contracted for seven consecutive quarters until the summer, grew by 1.2% in the three months to the end of September.

Iceland famously agreed in a referendum to reject a scheme to repay most of its debts that were once worth 11 times its total national income.

In contrast to Ireland, Iceland's taxpayers refused to foot the bill for the debts accumulated by the banking sector. Bondholders were told to accept dramatic reductions in the value of repayments on bank debt after the sector borrowed beyond its means to fund ambitious investments abroad.
By contrast, Ireland guaranteed all depositors and all bond holders, and will be crushed by that debt for years.

Rule number one of these sorts of meltdowns is that the bond holders are professionals, and they get interest because they are taking a risk, and risk means a chance of default.

The argument that is made against Greece, or Ireland, or the rest of the PIGS taking a similar approach is that it they need to maintain the confidence of the markets in order to prosper economically.

This is wrong.  It is literally a confidence game.

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