Iceland: Bankers convicted, unemployment down
Remember Iceland? During the high-flying early 2000s, its three main banks went berserk, paying high interest rates to international investors that accumulated deposits equal to more than 100% of the country’s gross domestic product (GDP) and making loans equal to 980% of GDP. When the collapse came, Iceland took a route not taken by Ireland, Spain, and other EU countries: Rather than bail out the banks, the government simply let them go bankrupt. The value of the krona fell by about half, the country was embroiled in disputes with the Netherlands and the United Kingdom over paying off Dutch and British depositors, and it had to take an International Monetary Fund (IMF) loan just to stay afloat.
When we last checked in, there were indictments and criminal investigations of the officers of all three banks, and Icelandic banks were forced to forgive all mortgage debt in excess of 110% of a home’s value. Iceland’s 2012 unemployment rate was 6.0% compared to Ireland’s 14.7%. But that was two years ago; what’s happening now?
In December 2013, four top officials of the country’s formerly largest bank, Kaupthing, were sentenced to jail terms ranging from five and a half years for its chief executive to three years for one of the majority owners. While their cases are currently under appeal, they were indicted this July for further fraud charges. Various bank and government officials have had final convictions as determined by the Supreme Court of Iceland; Wikipedia has a handy rundown on where numerous cases stand, all based on Icelandic-language sources so I cannot read them myself.
Homeowners are still in difficulty in Iceland, however. This is because mortgages in Iceland are usually indexed to the inflation rate; that is, the amount of principal is increased by the rate of inflation. Iceland’s inflation rate was 5.2% in 2012 and 3.9% in 2013, while Ireland’s inflation was 1.7% in 2012 and a near-deflation 0.5% in 2013. That is a pretty hefty load for Icelandic homeowners. The current conservative government has instituted a new round of mortgage relief, but there are a lot of devils in the details. Almost half of the “relief” comes in the form of people being allowed to use their retirement savings (which are tax-advantaged like U.S. individual retirement accounts) to pay down their debt. Yeah, it’s great to pay your mortgage with pre-tax dollars, but it’s still your own money you’re paying, which will no longer be available for retirement. The IMF has raised doubts about the plan’s overall effect on government finances, too.
As I mentioned in my last post, unemployment in Iceland stood at 4.4% in July, versus 11.5% in Ireland (navigate to Labour Force Statistics, then Short-term Statistics, Short-term Labour Market Statistics, then Harmonised Unemployment Rates). And, as I also mentioned in the post, Ireland’s unemployment rate has been artificially lowered due to net emigration from the country.
While Iceland suffered a great deal from the crisis and is by no means out of the woods, it looks like the country made the right call by not bailing out the banks. The economy is growing and unemployment is down to less than half of its peak crisis level. As Paul Krugman has emphasized, having your own currency to devalue helps as well, although it substantially raised inflation and mortgage balances. Iceland was dealt a bad hand by its bankers, but it’s making at least some of them pay for that, which is more than we can say in the United States.
“but it’s making at least some of them pay for that, which is more than we can say in the United States”
Icelandic “bankers” were prosecuted essentially for reckess behaviour which lead to the bankruptcy of the companies involved. No large US bank went bankrupt, and of those which received TARP funds, arguably only Citi ever looked like actually needing them, and even then only due to funding market lock-up, rather than insolvency.
US prosecutors from a swathe of agencies have pored over the actions of all involved and after all these years, failed to find anything for which to prosecute anyone from the large banks. So it is fair conclusion that there wasnt anything done which deserved prosectution. Note we are talking about true banks here ie ones with depositors.
I also note that Iceland attempted to prosecute its own Prime Minister for, in a nutshell, making bad decisions. Just because some other country chooses to prosecute for something, doesnt necessarily make it the ‘right’ thing to do in another country. I dont, for instance, see anyone in america convicted and executed for Christian Proselytising, so the fact that has occurred elsewhere, but not in american, is not a negative indictment on american, is it?
Ken, could you explain the logic behind indexing mortgages to inflation? I understand indexing an interest rate but indexing principal sounds a bit odd.
Actually indexing mortgages to inflation means that the mortgages look very much like TIPS. That is the investor will get back the same purchasing power when the mortgage is paid off that the investor gave to the buy when the house was purchased.
Picked up by reddit news also: http://www.reddit.com/r/news/
and here also: http://www.blacklistednews.com/Iceland%3A_Bankers_convicted%2C_unemployment_down/38225/0/38/38/Y/M.html
Didn’t WAMU and Lehman brothers essentially both collapse? I could have sworn a few other large banks went bankrupt.
With all of the Icelandic comments at NC, you have the makings of a new post
I think it’s doubtful that the Justice Dept. and other prosecutorial agencies couldn’t find evidence to justify prosecution when one recalls the information regarding the rating agencies’ deliberate skewing upwards of the mortgage bundles they rated and the knowledge of the bundling investment houses and banks of what was going on. The usual process of going after lower level employees and working towards the top did not occur. It seems much more likely that a policy decision of too large to fail governed the lack of action by prosecutors. Large money payments have been obtained against various large banks premised on allegations of fraud but no prosecutions of individuals within the banks for fraudulent behavior that could lead to jail time.