Thursday, 27 June 2013

UK & Iceland GDP comparison

After the recent GDP figures from ONS, the general reaction was rather pessimistic. FT had e.g. this tweet and article:

True, this doesn't look good. In fact, after the revisions, UK GDP volume is now further below its top before the financial crisis than Iceland's GDP is. The following graph is based on data from ONS and Statistics Iceland. The top is given the value 100 (3Q07 for Iceland but 1Q08 for the UK). Chained volume measurement, seasonally adjusted (yes, the Icelandic data are SA although they don't look like it).

Back on track: Iceland is edging closer to its GDP volume top before the crisis. The momentum is also stronger.

Iceland's GDP is now 0.4% closer to its top before the crisis than UK's GDP compared to its top. Then again, Iceland had its top two quarters ahead of the UK.

But - there is always a "but" - this is a volume measurement. And although economics teach us to think in volumes and real measurements, we arguably do not rely on barter (and never did) in our commerce. We use money and money is different between economies: try paying with Queen's money in Iceland and you'll be a laughing stock (I've tried, the guy just grinned at me) just as you will be if you try using the ISK in the UK.

So what happens if we price the volume produced in the same currency, say the GBP. That comparison makes sense: we could be producing the same volume as before the crisis but is it worth the same?

The UK volume is already priced in pounds so no need to handle that in a special way. But the Icelandic volume measure uses the ISK as a measurement stick and that measurement stick has changed significantly since before the crisis. If we measure both of the volumes in GBP, the following graph is the result.

Still long way to go: measured in GBP, the Icelandic GDP volume does not seem to be edging must closer to its previous height

Notice the drop in the Iceland data in 2006. This is the "Geyser crisis", a short wake up call to the fact that we were in a bubble. But it did not last long; politicians and prominent businessmen claimed everything was peachy, the housing bubble restarted (held up with exchange-rate linked loans which have now been deemed illegal) and the banks kept on growing. Then, finally, the party ended.

To my British friends I say: sure, you're not in the best of situations. But if it makes you feel better, you're not in the worst.

Monday, 24 June 2013

How much household debt was cancelled? Update

In April last year I wrote about how much of Icelandic households' debt was cancelled. Now, we've got new info on the topic.

And the amount: 247.5 billion ISK. This figure comes from the Icelandic Financial Services Association in their comment on the new government's 10-step plan of general debt relief to Icelandic households (they don't really comment on it, they are going to wait until the government actually describes how they're going to do this).

What are the sources and the reason for the debt relief so far? The IFSA comment has a handy table to show us (my translation). The left-most column is mine as I thought it would be informative to note where the initiative for each part came from. In the cases of where I've put "Legal System" it is due to rulings regarding the illegality of certain credit contracts, first and foremost ISK denominated debt that is indexed to the exchange rate. That sort of indexation is illegal in Iceland since 2001 (though it did not stop the contracts to be created during the height of the credit party). Finally, do note that the figures due to ruling 600/2012 (a supreme court ruling regarding the illegality of certain exchange-rate indexed loans) are estimates and not entirely realised as of yet.

The total debt relief to Icelandic households, 2009-3Q2012.

Despite this nearly 250 billion ISK relief, Icelandic households are still pretty indebted. In the newest Financial Stability report, the Central Bank of Iceland estimated that the outstanding household debt amounted to around 110% of GDP. That is roughly the same ballpark as Ireland is playing in - although the Irish are not paying a 4-5% real rate of interest on their debt as Icelanders do.

From the newest Financial Stability Report (Central Bank of Iceland)

Nevertheless, the debt jubilee has of course had some effects; one should expect that when debt amounting to 15% of GDP is cancelled. But the situation is still fragile and we should not expect it to improve as easily as it did in the early 2000s when an investment boom was creating a lot of jobs and wage income.

Icelandic households' ability to live on after-tax monthly income (source: Statistics Iceland)

Tuesday, 11 June 2013

Minister of Finance Comments on the Housing Financing Fund

The new minister of finance, MP Bjarni Benediktsson, spoke with Bloomberg the other day. The topic was the Housing Financing Fund and its "red numbers" as Benediktsson put it.

The most notable part of the interview was when Benediktsson wished that creditors of the fund - the owners of HFF bonds - would be "flexible" if and when HFF would request discussions on changing the stipulations on the bonds. The problem with the bonds is that they aren't callable while the HFF mortgages are (in most cases) and have for the last 3 years or so been refinanced with non-indexed mortgages from the banks. The result: HFF sits behind with high-interest debts which aren't callable and truck loads of cash.

Benediktsson guessed in November 2012 that HFF would need perhaps as much as 200 billion ISK from the state but the Fund operates with an avowed state guarantee. The problem is that there is not a single word about state guarantee for HFF in laws about state guarantees. So while it is the "legal understanding" of Benediktsson (who is an educated lawyer I may add) that there is a state guarantee on the HFF bonds, one can easily argue that there is no such formal backup in Icelandic laws.

This is not the first time a politician comments on the HFF situation. In November 2012, trades with HFF bonds were halted twice. The first trigger was a stampede of sellers in the wake of an article in Viðskiptablaðið ("The Business Newspaper") where it was said that the un-callable bonds would have to be made callable to save the Fund. Not a week later, MP Sigridur Ingadottir, commented on the situation, again with Bloomberg, and said it would be necessary to enter renegotiations regarding the stipulations of HFF bonds. Another stampede followed.

In an interview with RUV (The Icelandic "BBC") in November, I pointed that while the state was regularly pumping equity into the Fund - it has gotten 46 billion ISK from the state in new equity since 2010 - the Fund would be able to pay its debts and bondholders could sleep peacefully. But this constant need to pump equity into the Fund would harm the chances of reaching a balanced fiscal budget. And the problem is that a balanced budget is something that is practically a prerequisite for abolishing the capital controls. Both the Central Bank and new minister of finance, MP Bjarni Benediktsson, know this. Abolishing the capital controls is something that is prominent on the "to do" list of the new government. Benediktsson called the capital controls "a flashing warning sign" for foreign investors, telling them to stay away from the Icelandic economy.

So there is an interesting situation brewing. The new minister of finance knows that one of the barriers that he has to cross in order to facilitate the abolishment of capital controls is to get a balanced budget. What is stopping him from doing that is a potential 200 billion ISK bill that arises due to the avowed state guarantee on the Housing Financing Fund. On top of this come a few election-promises such as lowering taxes and financing a debt jubilee to Icelandic households. Endeavouring to mitigate that problem, he wishes that creditors of HFF will be "flexible" when and if the HFF will request negotiations on the stipulations on HFF bonds.

And who are the creditors of HFF? Mainly Icelandic pension funds (64%). Foreigners hold only 4% of outstanding HFF bonds. Something tells me that Icelandic pension funds will never give back an inch when, not if, negotiations on the HFF bonds' stipulations will happen. Something else will have to give in.