Iceland upgrade sure makes default look palatable
A friend commented to me when he saw the story that Iceland had been upgraded by Fitch, the ratings agency, that this "sure makes default look palatable". Obviously, Iceland is not out of the woods yet but their relative success says there are other ways to get it done.
Iceland is safe to invest in again, according to Fitch, which has upgraded its credit rating three years after its economy spectacularly collapsed.
Fitch raised Iceland’s sovereign rating by one notch, to BBB- from BB+, meaning that the country’s debt is now "investment grade".
Iceland’s economy imploded under a mountain of debt in 2008, forcing an International Monetary Fund bailout.
Since then, the debts of its neighbours have sparked a crisis in the eurozone.
Fitch said the decision "reflects the progress that has been made in restoring macroeconomic stability, pushing ahead with structural reform and rebuilding sovereign creditworthiness".
In 2008, its three banks failed under their enormous foreign debt, which at one point was larger than the Icelandic economy.
The value of the Icelandic krona plunged, which made its exports more competitive. The new government of 2009 was allowed to carry on borrowing and spending for another year before spending cuts kicked in.
I think the January headline from the Irish Independent that Iceland fared better than us by letting its banks fail makes sense. The lesson from Iceland is most applicable to Ireland since its core problem was a banking crisis. Is it too late for Ireland on the bank debt front? Perhaps, but at a minimum, the Irish have been models of austerity, and to the degree they don’t meet their targets, they should be given a break via bank debt haircuts.
Spain, take note.
About Edward Harrison
- Joseph Stiglitz on Iceland’s Crisis and Recovery 3 Nov 2011
- With heavy Greek exposure, three largest banks in Cyprus now junk 2 Feb 2012
- Moody’s: Iceland, Latvia and Hungary in “fragile stabilization” 23 Sep 2009
- Contagion: Sovereign Credit Default Swap Wideners – Guess Who? 1 Nov 2011
- Fitch: larger bondholder haircut equals better Greek rating 21 Sep 2011
That comment about Ireland makes me sick because it is so true.
What is also stomach churning is how the political elite here in Ireland were constantly fearmongering ,warning of starvation and devastation if we went Iceland’s way.
I have heard nothing ,absolutely nothing on Irish media(who were largely complicit with the elites) or from our politicians about Iceland’s re emergence as a viable ,independent economy.
Ireland was sold a massive lie in that their future depended on bailing out the banks. If they had defaulted they would probably be doing better now, even if they had stayed in the eurozone. There would have still been significant pain from domestic mortgages, but that would have lowered the costs of housing for all and actually given the market a floor. The politicians should be charged with treason for the massive theft from tax payers for their decision.
Ireland had only IT services and tax havens to sell — no soybeans or fish; only peats. (“Peats be with you” [James Joyce])