The Economic Return of Iceland Has Proved That the Joke Was on Ireland
December 20th, 2012Via: Irish Independent:
WAY back in the autumn of 2008, the joke in financial circles was that the only difference between Ireland and Iceland was a letter and six months. Now, with the Icelandic banks preparing to issue foreign currency bonds once again, it turns out that the joke was on us.
Remember when the Icelandics did the unthinkable and, unlike Ireland, told bank creditors to take a hike? They also imposed capital controls and allowed the value of their currency to fall – the Icelandic krona has lost almost half of its value against the euro over the past five years.
The “experts” queued up to assure us that these latter-day Vikings would be severely punished for their impertinence. While no one forecast that a hole would open up in the North Atlantic and swallow Iceland whole, some of the predictions came pretty darned close.
Meanwhile, we in Ireland did what we were told and repaid over €70bn of bank bonds at par. By doing so, even at the cost of bankrupting the State, the “experts” assured us that we would retain the confidence of the markets. Now, four years later, it is clear that, not for the first time, the “experts” have got it wrong. Catastrophically and utterly wrong.
Since putting the taxpayer on the hook for the banks’ debts, the domestic economy has shrunk by almost a quarter in nominal or cash terms. And any real recovery is still a long way off. The documents along with this month’s Budget reveal that the Department of Finance is expecting Irish GNP, basically the domestic economy, to grow by 1.4 per cent in 2012 and 0.9 per cent next year. Other forecasters are taking a far more pessimistic view.
Way out in the North Atlantic, things have turned out rather differently. Economic growth is expected to be 3.1 per cent this year and 2.2 per cent in 2013. But surely after stitching up its bank creditors – the Icelandic banking default cost $85bn, a massive amount for a country with a population of 320,000 people – the country remains persona non grata with the international financial markets. Having been so badly bitten once, the markets must be twice or even thrice shy of Iceland.
Not so. The Icelandic treasury successfully flogged $1bn of 10-year bonds to investors in May. These bonds were initially priced to yield a spread of 407 basis points (4.07 per cent) over comparable US treasuries, a margin which has since narrowed to 296 basis points.
In the financial markets, as elsewhere in life, eaten bread is soon forgotten. Would-be investors in Icelandic bonds focus most of their attention, not on what happened in the past, but on what is likely to happen in the future.
