Icelandic, Greek sagas show sovereign risks

January 7, 2010

— James Saft is a Reuters columnist. The opinions expressed are his own. —

Developments in cash-strapped Iceland and Greece nicely illustrate two themes for 2010: sovereign risk and financial balkanization.

Iceland is balking at crushing terms demanded as part of its making whole overseas depositors in its ruined banking system, while Greece is involved in a game of chicken with the euro zone authorities over how, when and with whose assistance it heals its fiscal difficulties.

Like so many of us paying bills in January we ran up last year, they face a depressing prospect and no easy way out.

First, Iceland, whose president vetoed an agreement with Britain and the Netherlands to pay about $5 billion towards the costs of reimbursing depositors in its failed Icesave bank, saying he would put the bill to a referendum. While British and Dutch officials have mustered up a good show of outrage, President Grimsson’s move should not surprise; he was petitioned by a fifth of the population, each of whom can look forward to helping to pay back their individual $17,000 share of the costs.

Iceland is not refusing to repay the debt, which it acknowledges, but wants repayments tied to gross domestic product through 2024 with the possibility of a renegotiation if the full amount is not repaid by then. It is a brave move, and maybe a foolhardy one, given that the rejection puts in doubt an aid package from the International Monetary Fund and Scandinavia, as well as potentially hurting its bid to join the European Union. Iceland’s debt has already been downgraded to junk status by Fitch Ratings, with similar moves likely.

No one looks good in this saga, certainly not Iceland, which was effectively a hedge fund with a small fishing fleet attached and, you have to say, vastly better controls on overfishing then overlending. The Netherlands and Britain also look silly and incompetent; neither took effective steps to protect their citizens from the menace of Vikings offering higher rates of interest. Last but not least is the credulousness and cupidity of the British and Dutch depositors, including some local governments which not only chased the highest rates of interest but sometimes concentrated the vast majority of their funds with one bank.

A pox on everyone’s house then, but someone has got to pay. The point here is that public opinion in Iceland does not necessarily subscribe to the rules of the game as played in Washington and Frankfurt. If a sensible compromise is not reached, it is not inconceivable that Iceland’s negotiating position hardens. It is far from clear, for example, that Argentina is worse off for having thumbed its nose at the IMF and global financial community in 2001, nor is it apparent that Turkey, for example, has done well out of compliance.


The central case is a compromise, but the disagreement itself is instructive. Iceland, like Ireland but suffering from not being inside the European and euro zone tent, shows in an extreme way that governments pledging to make good debts is entirely different from them in the end making them good. The United States borrows on equal terms from the bond market and Iceland as a supplicant from the international community, but the principal is the same. Sovereign risk and brinkmanship go hand in hand.

An Icelandic blowup would also give impetus to moves by countries to contain the risks they face in their banking system to more easily controlled onshore players and activity. There has been good work on the international level to avert this, but it is also clear that politicians and regulators have reasons to make local rather than international lending a priority, both to control risks and to benefit their own banking systems. This, which could amount to financial

Balkanization, would retard growth and cause international friction. Just wait until the effects of the stimulus begin to ebb in the second half for this to gain traction.

European Central Bank Executive Board member Juergen Stark delivered a sharp rebuke to Greece in Italy’s Il Sole 24 Ore newspaper, saying in essence that Greek competitive and fiscal problems are homemade and that investors expecting a euro zone bailout are “deluded.”

Given that the ECB is not the authority which would effect a bailout, if one were needed, this is probably best viewed as jawboning. If markets treat Greece like it is in receipt of a bailout it — like, say, Citigroup — will be less inclined to take painful steps.

Like Iceland however, the common themes are sovereign credit risk and situations where it is partly unclear who must pay and doubly unclear who will do best out of paying or balking.

There is lots of paying up by governments yet to be done, and doubtless there will be lots of balking too.


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There is a really simple solution. Forgive all debt. Take your losses. The governments of the respective countries can dissolve internal financial obligations and start from scratch.

Any system can be reset. But nobody wants to eat it. Considering we are ALL eating it right now it shouldn’t really make a difference. Our moneys is worthless anyway. It’s only value lies in “faith and credit” both of which have evaporated.

Just reset the system and call it good.

Posted by Benny_Acosta | Report as abusive

Is this some gringo boys shifting the goal post to suit their convenience and priorities? If you guys did not have so much debt you would not talk this way. America and few other so-called developed countries drove many poor economies down under – because of their debt – without any sympathy and support once. Now you want your debt forgiven and forgotten. Pay up dude! The world is not your servant or your slave to merely do whatever you want.

If you took high careless risks with or without preparation, with or without greed, with or without stupidity you still need to face the consequences – unless you were cheated or mislead. It is time you guys ate the humble pie and learn to share more, give more and show respect for sensitive sensible smart people in your country and beyond – not just the street smart thugs (with MBAs), or business savvy cheats. Stop making up rules, or breaking the ones you set, to stay in power and make money. That kind of “racist classist oppressive mentality” should be over!

Iceland will pay up – with some adjustments! Greece will get back on track – with some guidance and strictness. As long as some countries and guys do not meddle. You are not the global police, nor should you be the global manipulators. Eat the humble pie and pay up – and stop declaring wars just to distract, disobey (rules you yourselves have created) and avoid responsibility. Many of you should start going to developing countries to do some “street cleaning, toilet cleaning and begging”. And America should stop being a colony of some small country in the ME. Get a spine and show some real virtue. You guys are lucky to have good leaders – if they are allowed to lead. In some places leaders are the problem – they either don’t do want their people want, or they don’t lead with thought and spine. In other places people are the problem – not the leaders. It is the latter that is true in your system. Now Banks and their big gringo boys (not the smartest in the room, but definitely the most cunning) can start paying up – and support real thinkers, doers and sensible investors, in stead of their cronies at the golf club.

Posted by Globalwatcher | Report as abusive

The common perception that sovereigns usually don’t default.
While history full of examples when governments defaulted.
The logic behind this perception that in worse case a government can print money to payback loans. Formally obligations will be met at the cost of inflation. But in case of Greece and Iceland they don’t have control over printing press. Ooooppppssss…
Spain, Italy as well as proud Baltic countries are next in line to discover that they have to control over printing press.

BTW Over 30% of Latvia 2010 budget financed by EU loans.
Looks like EU governments debt is not really reliable as USA.

Posted by skv_usa | Report as abusive

Sell the EURO. It’s toast. That supposedly intelligent people – with degrees, no less – actually believed the EURO could compete one-on-one with the greenback has to rank as one of the biggest con jobs in recent history, on a par with ‘climate change’. Deutschemarks, anyone?

Posted by Gotthardbahn | Report as abusive

The Greek government will not be able to take the necessary measures to balance the books as the unions would never let them. Greek ministries are stuffed with poorly paid and unproductive staff who need to be thinned out as the state is slimmed down. It will never happen. The ECB had better prepare for what they are going to do when Greece defaults. Italy is an even bigger problem that no one wants to really admit to – least of all the Italians! When you also add in Spain, Portugal and Ireland the outlook for the Euro is not very good. These are only the countries I deal with – as for the Balkans?!!!! Who knows. The currency markets will soon realise that Germany, Holland and France cannot bail out these economies and that the Eurozone is faced with a long period of depression ( as opposed to recession ). I would also sell the Euro long term.

Posted by paulos | Report as abusive

Further to my earlier comment – just take a look at the latest unemployment figures for the Eurozone basket cases and just think about the long term implications for the various economies and the Euro! Add in the feeble growth rates and it is easy to see massive problems looming.

Posted by paulos | Report as abusive

I see my earlier comment has not made it! I deal with Greece, Italy and Spain and know the economies intimately through dealing with businessmen in each country and talking to people on the street. I am sure that the Greek government will never be able to make the cuts necessary to balance the books. The unions will never allow it. Greek ministries are stuffed full of poorly paid unproductive staff and the private sector also has too high a level of employees. It would require an unacceptable level of unemployment to begin to make an impact. Greece is small beer – Italy is a much bigger problem that no one wants to look too closely at – including the Italians. Add in Ireland, Spain and Portugal and you have a recipe for depression ( as opposed to recession ). I agree – sell the Euro long term as the market will eventually realise that Germany, Holland and France cannot carry the burden of these economies for ever.

Posted by paulos | Report as abusive

Following Iceland’s offer to renege on the Icesave debt, shall we see Germany hold a referendum on World War One reparations? Even more frightening is the prospect of Britain’s subprime minister, Gordon Brown, working out that rather than just bequeathing the cost of the bankers’ bonus bailout to the nation he should ask the British electorate whether they would rather not rat on all the nation’s debts. I think I know the answer to that one.
Ed Martin

Posted by EdMartin | Report as abusive

So much of this is old news in relation to Greece. The trouble started following the Athens Olympics – the government & the private sector misjudged the lack of demand for products & services when the Olympics ended. Greece, therefore, has been in its current position for years. Its national debt is clearly very high, however it is likely to be in recession for a shorter period than the UK. One of the reasons for this is that income/debt ratio per head is very low ie: each individual or company in Greece has less debt & more income than the average in the UK. From an investment perspective, it can’t get much worse therefore some would argue that investing in Greek companies now is the very best time. Conversely, noone quite knows if we have seen the last of ressecion in the Uk & noone has managed to predict what the future holds – one guess is that a four bedroom terraced house in Chelsea will still set you back £1.2M. Buyers are not stupid – this level is not sustainable going forward & is clearly not value for money. Barclays Bank has a debt equity ratio of nearly 2000% 7 none of the incumbent management seem to have changed at all, SME’s are going bust every day with more to come this year. So Greece has its problems however lets not kick the underdog when they are down when we have not fully recovered. We don’t have anything to gloat about and are not in a position to advise any other country.

Posted by JonWhite | Report as abusive