Iceland is doing so much better now that they have defaulted and, even more ironic, what ignorant analysts and economists believe is an inconvenient for the government is actually a blessing for the people: the fact that the government from Iceland cannot borrow on the markets is a very very positive side effect of this default, and I do hope that once the western civilisation as we know it has defaulted on their debt — no country is solvent except maybe Germany — they will introduce constitutional laws to prevent governments from running deficits and borrowing money — as Germany did a couple years ago.
Irish Bow to Trichet on Bondholders as Rescue Hits $142 Billion
April 1 (Bloomberg) -- Ireland yielded to the European Central Bank to protect bondholders even as its bailout bill for the region’s worst banking crisis moved to as much as 100 billion euros ($142 billion) after stress tests.Icelanders Reject British, Dutch Depositor Bill a 2nd Time
The ECB in Frankfurt was “solidly opposed” to imposing losses on investors in senior bank debt, Finance Minister Michael Noonan told broadcaster RTE today. The ECB agreed to provide “ongoing” funding for the banks, he said.
Ireland agreed yesterday to inject as much as 24 billion euros into four banks, while leaving bondholders untouched. The government already funneled 46.3 billion euros into the financial system and set up an agency that paid more than 30 billion euros to assume risky property loans. The total equates to about two-thirds the size of the Irish economy.
“The government’s position is very clear: It doesn’t want to take action on senior bondholders for the four banks that are going forward,” said Matthew Elderfield, head of regulation at the central bank, said in an interview with Bloomberg Television. “It recognizes that, on balance, that if you want to have these viable banks able to return to the market that would hurt their capacity to do that.”
Standard & Poor’s Ratings Services today cut Ireland one notch to BBB+ from A-, though revised its outlook to stable.
As recently as March 28, Agriculture Minister Simon Coveney said the government planned to impose losses on senior bondholders in the banks to cut the costs of its bailout.
“Taking all of the losses of the banking system and putting them on the balance sheet of the government doesn’t make sense,” Nouriel Roubini, co-founder of Roubini Global Economics LLC, said today in an interview from Cernobbio, Italy, with Maryam Nemazee on Bloomberg Television’s “The Pulse.” “Eventually, the back of the government will be broken.”
“Rather than go after over 20 billion euros in unguaranteed bonds, the government is making ordinary citizens bear the burden of this debt,” Gerry Adams, leader of nationalist party Sinn Fein, said in statement today. “Rather than act in the interests of the Irish people they are acting in the interest of the banks.”
The decision not to seek burden-sharing with senior bondholders “is a recognition of reality that Ireland is depending on continued funding for its banks from the ECB, which is setting the rules,” said Dermot O’Leary, chief economist at Goodbody Stockbrokers.
April 10 (Bloomberg) -- Icelanders rejected a depositor claims accord with the U.K. and Netherlands for a second time in as many years as voters signaled they don’t want their tax funds to cover foreign losses caused by a private bank.Icelanders Reject Depositor Bill, Forcing Year-Long Court Fight
The bill, which set the terms for covering the depositor losses, was rejected by President Olafur R. Grimsson in February after being passed by a two-thirds majority in parliament.
“Nowhere does it say that Iceland is legally obliged to pay for this ridiculous Landsbanki adventure,” said Stefan Gunnarsson, a shop assistant in downtown Reykjavik. “If a court finds that we are legally responsible, so be it. Until then: No thanks.”
Grimsson said in a Feb. 23 interview he rejected the accord because Iceland’s legal obligation to pay is “unclear,” adding the matter shows that European banking laws haven’t been “thoroughly thought out.” The referendum let the people decide “whether private citizens, taxpayers, should be obliged to repay the losses created by a private bank,” he said then.
The latest Icesave accord would cost the state about 47 billion kronur ($419 million), while the remaining debt will be covered using the proceeds of Landsbanki assets, the negotiating committee representing Iceland said in December. Britain is lending Iceland 2.35 billion pounds ($3.85 billion) to cover the depositor losses, while the Netherlands is lending 1.3 billion euros ($1.9 billion).
Gunnarsson said the referendum is “a wakeup call for the citizens in other countries.”
“They’ll realize that there’s no fairness in pushing bank losses onto taxpayers when things go sour, but pocketing the gains when everything is going well,” Gunnarsson said. “A big fat ‘no’ from Iceland will drive that point home.”
Failure to resolve Icesave through a referendum “could easily muddy the waters,” central bank Governor Mar Gudmundsson said in a speech on April 7. A no vote “would impede foreign borrowing and delay capital account liberalization, although it is not clear how strong or persistent these effects would be.”
Iceland has relied on a $4.6 billion bailout led by the International Monetary Fund and on capital controls to prevent a sell-off of the krona. The caps, which the central bank estimates are stopping investors from selling about $3.6 billion in krona assets, have allowed the trade surplus to support the exchange rate and limit import price gains. The central bank has cut rates 15 times in two years as inflation eased to within the bank’s 2.5 percent target.
April 11 (Bloomberg) -- “What is clear is that there will be a downgrade from Moody’s and perhaps Standard & Poor’s,” said Asgeir Jonsson, an economist at Reykjavik-based asset manager Gamma. “This will force the government to postpone its plans to enter the international bond markets.”
The European Free Trade Association’s Surveillance Authority in May last year started infringement proceedings against Iceland under its obligation to cover all depositor claims. Those proceedings, which had been shelved during Iceland’s parliamentary handling of Icesave, will now be resumed, said Sigurdur Lindal, a law professor at the University of Iceland.
“A ruling from the EFTA Court isn’t formally binding on Icelandic authorities, although it does set a precedent,” Lindal said in a phone interview. “The U.K. and the Netherlands will likely claim that Iceland discriminated against depositors depending on nationality. However, that matter is not in any way clear cut.”
Grimsson said the referendum “enabled the nation to regain its democratic self-confidence and to express sovereign authority in its own affairs,” in a speech yesterday. Three days after his veto, he said he rejected the accord because Iceland’s legal obligation to pay is “unclear,” adding the matter shows that European banking laws haven’t been “thoroughly thought out.”
The result of the Icesave referendum shows most voters agree. [...]