ft.com/economistsforumAll times are London time
News
The Greek government has promised to slash its fiscal deficit from an estimated 12.7 per cent of gross domestic product last year to 3 per cent in 2012. Is it plausible that this will happen? Not very. But Greece is merely the canary in the fiscal coal mine. Other eurozone members are also under pressure to slash fiscal deficits. What might such pressure do to vulnerable members, to the eurozone and to the world economy?
Having falsified its figures for years, violating the trust of its partners, Greece is in the doghouse. Yet, even if it bears much of the blame, the task it is undertaking is huge. In particular, unlike most countries with massive fiscal deficits "“ the UK, for example "“ Greece cannot offset the impact of fiscal tightening by loosening monetary policy or depreciating its currency.
The remainder of this article can be read here. Please post comments below.
How could Iceland go back on its word and refuse to pay for Icesave? In the past few days though, Iceland has been trying to explain, that that we are NOT refusing to pay and we still absolutely intend to fulfill all our obligations. To understand this seeming paradox, it is necessary to look at what is really going on behind the scenes. 1. The old Landsbanki (Icesave) bankruptcy proceedings. The old Landsbanki (LBI) winding-up board publishes regular reports on the status regarding recovery of assets and its liabilities: http://lbi.is/creditorinformation/creditormeetings/ According to the most recent reports the key figures are: (all amounts are converted to Euros using the current exchange rate ISK/EUR of 180.5) Total assets of old Landsbanki: 819B ISK (4.5B Euros) Bond from new Landsbanki (NBI): 345B ISK (1.9B Euros) Total LBI assets available: 1164B ISK (6.4B Euros) Total deposits (Icesave): 1319B ISK (7.3B Euros) According to Icelandic laws, the depositors will have priority to all LBI assets during the winding-up process. If we compare the total assets available with total deposits, it is clear that there are enough assets available to cover nearly all the deposits (1164/1319 = 88%). As almost all the Icesave depositors have already been paid out, it is actually the deposit insurance funds in each respective country that have taken over the original claims. These are TIF in Iceland, FSCS in UK and DNB in Netherlands. Furthermore, all payments to TIF will automatically be forwarded to FSCS/DNB, to cover the Icesave 'loans' from those two funds. So effectively ALL bankruptcy payments from the LBI will always go to FSCS/DNB in the end. This obligation has already been fully accepted by Iceland without any dispute, irrespective of the Icesave agreement, as this is in accordance with the existing Icelandic bankruptcy laws and conventions. 2. So what then is the real problem with Icesave? The problem is the actual agreement that was negotiated between Icelandic government and UK/Netherlands. According the 94/19/EC directive (which itself has a lot of problems I will not go into here), each deposit guarantee fund is required to pay minimum of 20000 Euros per depositor. For the Icelandic deposit insurance fund (TIF) this amount is actually a bit higher or 20887 Euros, while UK and Netherlands unilaterally decided to pay higher amounts to their depositors. If you compare the total liability of 3.9B Euros by TIF, with the total assets available 6.4B Euros by LBI, it seems very clear that it is more than enough to cover its obligations. NOW WE COME TO THE CRUX OF THE PROBLEM. According to the current Icesave agreement, Iceland is required to pay MORE than just for the Icesave deposits! 3. Distribution of old Landsbanki (LBI) assets (the Ragnar Hall issue) As demonstrated here above, there are more than enough assets in LBI, to cover all the Icesave liabilities of TIF. The real problem lies in HOW the assets of LBI are being distributed, according to the current Icesave agreement. Here in Iceland, a prominent part of the Icesave discussion has been about something, which most of the time is called the "Ragnar Hall" issue, named after the supreme court lawyer that first pointed it out . Outside Iceland, this particular issue has received almost no publicity, but as it is one of the critical reasons behind the intense opposition to the current Icesave agreement in Iceland, explaining it further might be helpful for other people. Basically, the Ragnar Hall issue involves whether each individual depositor claim should be treated as a single claim or not. Without going to into too much legal detail, according to Icelandic bankruptcy laws (and most other countries), each depositor claim should ALWAYS be treated as a single claim. This has the effect, that when it comes to distributing assets recovered by the LBI, TIF should get paid first the 20K Euros, and then FSCS/DNB whatever is left over, as they guaranteed Icesave deposits for more than the minimum of 20K Euros. Nevertheless, apparently due to heavy pressure by the UK/Dutch negotiators, the Icelandic negotiation committee agreed with the demand, that each claim would be divided into two separate claims (TIF vs. FSCS/DNB), each with equal priority towards payments from LBI. Even if TIF ends up getting paid the full amount, in accordance to Icelandic bankruptcy laws, the Icesave agreement requires TIF to pay money BACK to FSCS/DNB, to ensure each fund gets equal percentage. For reference, see article 4.2(b) in the original settlement agreement: http://www.island.is/media/eydublod/settlement-agreement.pdf This has the unfortunate consequence, that TIF will only receive partial payment towards its original 20K claim, even if there are more than enough funds recovered by LBI to cover the full 20K. This furthermore explains why TIF receives only the half 3.2B Euros, out of the total LBI recovery of 6.4B, which means it recovers only portion of its obligation to FSCS/DNB (current estimate 88%), instead of the full 100%. For more detailed legal reasoning on this particular issue in English, see for example the Mischon de Reya report, which can be found here (pages 15-24 and 78-79): http://www.althingi.is/pdf/umsogn.php4?lthing=138&malnr=76&dbnr=835&nefnd=fl The Ragnar Hall issue was actually mostly resolved in the first Icesave guarantee, through the so-called "amendments", that the Icelandic parliament Althingi passed into laws August 2009. But these amendments were later watered down again during the subsequent negotiations this winter with FSCS/DNB for the second agreement. 4. Interest payments from TIF to FSCS/DNB The second important issue behind the opposition of the current agreement in Iceland, is the interest that is being charged while everyone waits for the winding-up boards to finish recovering the assets of LBI. According to the current agreement, Iceland is required to pay 5.55% interest on the whole 3.9B Euro guarantee, until the recovery payments start coming in from LBI. These payments can easily end up being delayed due to potential lawsuits by other creditors of LBI, that currently are estimated to receive nothing towards their own claims. This agreement is considered fundamentally unfair by people in Iceland, as typically in bankruptcy proceedings, additional claims cannot be made for interest payments. This means, that any interest payments to FSCS/DNB, will always have to be paid directly by Iceland, as they cannot be recovered from the bankruptcy proceedings. The interest payments on the Icesave guarantee, averages to around 200M Euros per year. This will be accrued and added to the debt for the first 7 years and then paid down in the subsequent 8 years (2016-2024). The total interest payments are estimated to end up being somewhere between 1.5B and 2.0B Euros, which FAR EXCEEDS the estimated Icesave guarantee payments by Iceland (0.5B-1.0B Euros). If these amounts are compared against the total population of Iceland (320K), we can easily compute that this equals close to 10K Euros per person in Iceland. This amount has been quoted widely in the press, but many people still do not realize that most of the payments are for interest, not for the original Icesave obligation. 5. What is Iceland then committed to pay for Icesave? Most people in Iceland are fully committed to pay their fair share for Icesave. As has been shown here, the question is not about whether to pay for Icesave, but rather how much more than is actually required should be paid. The current Icesave agreement is likely to be voted down in the national referendum. This is due to the fierce opposition it faces in Iceland, where the current agreement is considered to be fundamentally unfair. The question then comes up how to resolve the issue in a fair and equitable manner. There are at least three solutions available that would be relatively easy to implement. A) The first solution would be to hand over the whole LBI bankruptcy estate over to FSCS/DNB and let them recover their claims directly as Martin Wolf was suggesting in his article. It is already clear that they will always receive everything from the bankruptcy anyway and its assets are more than enough to cover all the obligations by Iceland. B) The second solution is to remove from the current agreement, all references related to the Ragnar Hall issue, so all payments from LBI will be done according to the existing bankruptcy laws in Iceland. This will still require Iceland to pay interest on the 3.9B Euro debt, but the interest payments would be much lower, since it would now receive recovery payments from the LBI much faster, as it would not have to share them first equally with FSCS/DNB. C) The third solution would be to figure out some way to lower the interest payments/rate that Iceland is required to pay on the 3.9B Euro debt. This is basically a fairness issue, again as Martin Wolf mentions in his article. It is already very clear that Iceland is not the only one that is to blame for this mess, and it therefore it should not be the only one that pays for it. This option could be implemented in different ways, such as: i) Lower the 5.55% interest rate itself down to a more manageable 2-4% level ii) Delay charging interest for the first years while waiting for the first LBI payments to come in iii) Only charge interest on the actual amount that Iceland guarantees and not the LBI payments. All of the above solutions would help lower the guarantee payments by Iceland down to much more manageable level and still be fair to everyone involved. The only question is whether Iceland should be forced to pay so much more than is actually required, that it faces an insurmountable debt for decades to come.
In plainer English, it is both commercially insane and ethically wrong to ask the taxpaying public to pick up debts created by private banker stupidities. Taxpayers will become angry,and bankers be reassured that they are inviolate. Fiscal policy at present seems to me largely engaged in pretending that pain can be forever avoided. 'Governments do not create, but consume wealth'. So do infantile lending policies. http://nbyslog.blogspot.com/
© The financial Times Ltd 2009 FT and 'Financial Times' are trademarks of The Financial Times Ltd.
Read Full Article »