Tuesday, 8 May 2012

Guest Post: Is Iceland OK now?

Copy-pasted note from Gunnar Tomasson, ex IMF Senior Staff Member, he published on Gang8 website, answering Michael Hudson's question whether "Iceland was OK".


RE: [gang8] Krugman's mistaken belief that devaluation saves anything, even over-indebtedness

No, Iceland is not OK now.

I’m just back in the US after three weeks in Iceland where I had an opportunity to talk to old friends from all parts of the political spectrum.

There is a strong feeling that the long-established political order has outlived its usefulness - if that is a term which can be used to describe its record.

Is Iceland really OK?

I was on the State TV program Silfur Egils on Sunday April 22.

In a 15-20 minute interview, I addressed among other things the insurmountable – on present policies – problems faced by Iceland in the monetary/balance of payments field.

Briefly, Iceland’s current foreign exchange reserves are of the order of ISK 1000 billion (US$ 1 = ISK 125).

Did I say reserves?

Yes, but they are borrowed reserves – not reserves that Iceland has accumulated from past surpluses on its balance of payments.

Iceland’s GDP is currently of the order of ca. ISK 1800 billion (my guesstimate – may be off by ISK 50 billion or so in either direction).

In October 2008 Iceland responded to the collapse of its banking system – and much else – by introducing pretty harsh foreign exchange controls.

For example, foreign owners of pre-crash Glacier Bonds were estimated to be holding ISK 400 billion which were essentially “locked in”.

Just recently, it dawned on the authorities – and, apparently, the IMF – that they had forgotten to factor in another factor.

The Icelandic currency claims of the creditors of the old banks, whose assets are being liquidated for eventual distribution to creditors.

So, to the ISK 400 billion, add another ISK 700 billion – and Iceland’s borrowed foreign exchange reserves become even less impressive than before.

That’s one part of the monetary/foreign exchange problem.

The other part resides in the globs of ISK monetary and other liquid assets left over from the “good years” prior to October 2008.

If the foreign exchange controls were lifted tomorrow, Iceland’s borrowed foreign exchange reserves would vanish in the blink of an eye.

In other words, from a macro-economic point of view, the REAL worth of foreign and domestic ISK balances waiting to exit through the foreign exchange market is a fraction of their pseudo-worth at the current ISK exchange rate.

What to do?

In Silfur Egils I made a twofold suggestion – a summary version is as follows:

1. Let the Glacier bond etc. money exit at a STEEP premium over the current exchange rate of the ISK.

2. Call in outstanding ISK balances and exchange them for New ISK at differential rates – say, one to one for household balances and something much less favorable for larger balances.

The problem at hand is clear as daylight – the chances of anything being done about it along the above lines are zilch, given the current political power structure.

What to do?

Change the current political power structure!

A general election must be held no later than a year from now and there is turmoil in the Old Guard and hopeful urgency in its would-be replacement which cuts across conventional political party lines.

I had an opportunity to meet one-on-one with leaders of two of the latter parties for lengthy and fruitful discussions.

I am hopeful that they will be able to join forces, attract a large number of voters – and

Throw out the rascals come next year!


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