The economic return of Iceland has proved that the joke was on

WAY back in the autumn of 2008, the joke in financial circles was that
the only difference between Ireland and Iceland was a letter and six
months. Now, with the Icelandic banks preparing to issue foreign
currency bonds once again, it turns out that the joke was on us.

Remember when the Icelandics did the unthinkable and, unlike Ireland,
told bank creditors to take a hike? They also imposed capital controls
and allowed the value of their currency to fall – the Icelandic krona
has lost almost half of its value against the euro over the past five

The "experts" queued up to assure us that these latter-day Vikings would
be severely punished for their impertinence. While no one forecast that
a hole would open up in the North Atlantic and swallow Iceland whole,
some of the predictions came pretty darned close.

Meanwhile, we in Ireland did what we were told and repaid over €70bn of
bank bonds at par. By doing so, even at the cost of bankrupting the
State, the "experts" assured us that we would retain the confidence of
the markets. Now, four years later, it is clear that, not for the first
time, the "experts" have got it wrong. Catastrophically and utterly wrong.

Since putting the taxpayer on the hook for the banks' debts, the
domestic economy has shrunk by almost a quarter in nominal or cash
terms. And any real recovery is still a long way off. The documents
along with this month's Budget reveal that the Department of Finance is
expecting Irish GNP, basically the domestic economy, to grow by 1.4 per
cent in 2012 and 0.9 per cent next year. Other forecasters are taking a
far more pessimistic view.

Way out in the North Atlantic, things have turned out rather
differently. Economic growth is expected to be 3.1 per cent this year
and 2.2 per cent in 2013. But surely after stitching up its bank
creditors – the Icelandic banking default cost $85bn, a massive amount
for a country with a population of 320,000 people – the country remains
persona non grata with the international financial markets. Having been
so badly bitten once, the markets must be twice or even thrice shy of

Not so. The Icelandic treasury successfully flogged $1bn of 10-year
bonds to investors in May. These bonds were initially priced to yield a
spread of 407 basis points (4.07 per cent) over comparable US
treasuries, a margin which has since narrowed to 296 basis points.

In the financial markets, as elsewhere in life, eaten bread is soon
forgotten. Would-be investors in Icelandic bonds focus most of their
attention, not on what happened in the past, but on what is likely to
happen in the future.

What these investors see is that, by burning the bank bondholders rather
than taking these debts on to the national balance sheet, the Icelandic
sovereign is in a far stronger position to repay any future debts.

Compare this to the Irish situation. By being good boys did we retain
the confidence of the markets? No we didn't. We too were locked out of
the markets and were bounced into accepting an EU/IMF bailout in
November 2010. Far from doing better than the Icelandics, we have ended
up with the worst of all possible worlds. We are still stuck with the
banks' legacy debts and, a few carefully choreographed fund raisings by
the NTMA notwithstanding, the State remains largely reliant on official
lenders to fund its activities. This is because investors can see that,
with the debts of the Irish State likely to exceed €200bn – the
equivalent of more than 150 per cent of GNP – by the end of 2013, there
is no way the Irish sovereign can repay existing borrowings let alone
any new loans it may seek to raise.

Now, as if to add insult to injury, the Icelandic banks are preparing a
return to the markets. Unlike Ireland, Iceland immediately nationalised
its bust banks in the autumn of 2008 but refused to assume
responsibility for their liabilities. The cleaned-up Icelandic banks are
now getting ready to issue foreign currency bonds, the proceeds of which
will be used to help finance the thriving, export-driven Icelandic economy.

When we look at what has happened in Iceland, the proposed deal on
legacy Irish bank debt tastes like very thin gruel indeed. Once again
the Irish Government is talking up the chances of such a deal following
last week's apparent agreement by EU finance ministers on a new eurozone
banking supervision regime. The latest "deadline" for such a deal is
supposedly the end of March 2013. Given that several previous
"deadlines" have come and gone, don't hold your breath.

Maybe, instead of being the good boys it's time we followed the
Icelandic example and indulged in some Viking-style plunder and pillage.

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