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Iceland: From Boom to Bust, and Then What?
Thorvaldur Gylfason
Conference on Reform Capacity and Macroeconomic Performance in the Nordic Countries,
Copenhagen Business School, Copenhagen, 20-21 September 2013
Iceland: So?
The Chamber of Commerce recommends that Iceland
stop comparing itself with other Nordic countries
because we are superior to them in most respects.
Iceland Chamber of Commerce, February 2008.
Overview
• Historical background• Relevant comparisons– Denmark, Finland, Norway, and Sweden– Ireland, Portugal, and Greece– Faroe Islands
• Gathering clouds, once more–Weakened institutions, failed banks, broken
trust: Deep trouble– Uncertain prospects for reform and restoration
History and volatilityGDP per capita 1870-2012
(1990 international Geary-Khamis $) GDP per capita 1901-2012
(change in % per year)
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
Denmark Finland Norway Sweden Ireland Greece Portugal
19011908
19151922
19291936
19431950
19571964
19711978
19851992
19992006
-20
-15
-10
-5
0
5
10
15
20
Denmark
Iceland
Ireland caught up after 1980
1901-2012 1945-2012 1960-20120123456 Denmark
Iceland
Standard deviation
Source: Maddison Project. Source: Maddison Project and Statistics Iceland.
Background
1900 1904
1908 1912
1916 1920
1924 1928
1932 1936
1940 1944
1948 1952
1956 1960
1964 1968
1972 1976
1980 1984
1988 1992
1996 2000
2004 2008
2012 0
500
1000
1500
2000
2500
FramleiðslaFramleiðslugeta
Iceland: GDP per capita (1900-2012, constant prices)
1900: GDP per person was similar to that in Ghana today at ppp
Ghana
1900 = 100Actual output
Potential output
China
India
Botswana
Greece
Korea
Iceland’s per capita GDP
was equal to ca. half that
of Denmark in 1900, and
had caught up by 1960
Source: Statistics Iceland, World Bank World Development Indicators, and author’s computations.
Background
GNI per capita(1980-2012, current international $, ppp)
Nordics Periphery
0
10000
20000
30000
40000
50000
60000
70000
Denmark
Finland
Iceland
Norway
Sweden
0
5000
10000
15000
20000
25000
30000
35000
40000
45000
Greece
Iceland
Ireland
Portugal
Source: World Bank World Development Indicators.
Norway has left others behind
Iceland parted company in 2008
Where to look?InvestmentExportsEducationInstitutions
Comparisons
Gross capital formation(1965-2011, % of GDP)
Nordics Periphery
19651968
19711974
19771980
19831986
19891992
19951998
20012004
20072010
0
5
10
15
20
25
30
35
40
Denmark Finland
Iceland Norway
Sweden
19651968
19711974
19771980
19831986
19891992
19951998
20012004
20072010
0
10
20
30
40
50
60
Greece
Iceland
Ireland
Portugal
20002001
20022003
20042005
20062007
20082009
20102011
2012
-10%-5%0%5%
10%15%20%25%
Iceland: Collapse of net investment
Source: World Bank World Development Indicators.
% of GDP
Comparisons
Exports of goods and services (1960-2012, of GDP)
Nordics Periphery
19601964
19681972
19761980
19841988
19921996
20002004
20082012
0
10
20
30
40
50
60
70
DenmarkFinlandIcelandNorwaySweden
19601964
19681972
19761980
19841988
19921996
20002004
20082012
0
20
40
60
80
100
120
Greece
Iceland
Ireland
Portugal
Source: World Bank World Development Indicators.
Iceland: Exports shot up
when the króna collapsed
Comparisons
Greece and also Portugal
remain remarkably closed
Manufactures exports(1962-2012, % of total exports)
Nordics Periphery
19621966
19701974
19781982
19861990
19941998
20022006
20100
10
20
30
40
50
60
70
80
90
100
DenmarkFinlandIcelandNorwaySweden
19621966
19701974
19781982
19861990
19941998
20022006
20100
10
20
30
40
50
60
70
80
90
100GreeceIcelandIrelandPortugal
Source: World Bank World Development Indicators.
Norway pays for its oilIceland is decidedly low-tech
Comparisons
Labor force with primary education(1992-2011, % of total)
Nordics Periphery
19921994
19961998
20002002
20042006
20082010
0
10
20
30
40
50
60
70
80
90
Greece Iceland
Ireland Portugal
19921994
19961998
20002002
20042006
20082010
0
10
20
30
40
50
60
Denmark Finland Iceland
Norway Sweden
Source: World Bank World Development Indicators.
Iceland: Why so much primary?
Comparisons
Labor force with secondary education(1992-2011, % of total)
Nordics Periphery
19921994
19961998
20002002
20042006
20082010
0
5
10
15
20
25
30
35
40
45
Greece Iceland
Ireland Portugal
19921994
19961998
20002002
20042006
20082010
0
10
20
30
40
50
60
70
Denmark
Finland
Iceland
Norway
Sweden
Source: World Bank World Development Indicators.
Because there is too little secondary …
Comparisons
Labor force with tertiary education(1992-2011, % of total)
Nordics Periphery
19921994
19961998
20002002
20042006
20082010
0
5
10
15
20
25
30
35
40
45Greece Iceland
Ireland Portugal
19921994
19961998
20002002
20042006
20082010
0
5
10
15
20
25
30
35
40
45
Denmark Finland
Iceland Norway
Sweden
Source: World Bank World Development Indicators.
… and too little tertiary education
Comparisons
Unemployment(1980-2011, % of labor force)
Nordics Periphery
19801982
19841986
19881990
19921994
19961998
20002002
20042006
20082010
0
2
4
6
8
10
12
14
16
18
DenmarkFinlandIcelandNorwaySweden
19801982
19841986
19881990
19921994
19961998
20002002
20042006
20082010
0
2
4
6
8
10
12
14
16
18
20Greece
Iceland
Ireland
Portugal
Source: World Bank World Development Indicators.
Comparisons
Iceland joined
Nordic mainstream
Inflation(1961-2012, consumer prices, % per year)
Nordics Periphery
19611965
19691973
19771981
19851989
19931997
20012005
2009-10
0
10
20
30
40
50
60
70
80
90
Denmark
Finland
Iceland
Norway
Sweden
19611965
19691973
19771981
19851989
19931997
20012005
2009-10
0
10
20
30
40
50
60
70
80
90Greece
Iceland
Ireland
Portugal
Source: World Bank World Development Indicators.
2003-01
2003-09
2004-05
2005-01
2005-09
2006-05
2007-01
2007-09
2008-05
2009-01
2009-09
2010-05
2011-01
2011-09
2012-05
2013-0102468
101214161820
CPI
CBI Inflation target
Iceland: Missed inflation target% per year
99.95%
Comparisons
Banking
• Three main banks and Central Bank collapsed– Recapitalization of three commercial banks cost 18%
of GDP– Recapitalization of Central Bank cost 18% of GDP
• Damage incurred equaled seven times GDP– Foreign creditors, shareholders, and depositors lost
five times GDP– Local residents lost two times GDP (stock market was
wiped out, pension funds took a big hit) – Public debt rose from 29% to 93% of GDP, or by 64%
of GDP – world record
Collapse of institutions
Banking
• Banks broke the law (SIC report 2010)– Insider trading– Market manipulation– False reporting– Breach of trust– Foreign-currency indexed loans– Local-currency indexed loans?
• Special prosecutor’s office set up in 2009– Staff expanded from 3 to 100, with foreign help– 80 cases involving nearly 200 individuals
Collapse
Black, Ferguson, Galbraith, Stiglitz and others make similar claims for the US, with Akerlof and Blinder
not far behind
Banking
• No banking strategy in place as yet– Rumors of Russian money laundering before crash– No foreign competition in sight yet– Government has a big stake in Landsbanki, smaller
stakes in other two banks– Rumors of selling stakes to, yes, Chinese banks– New government immediately closed down EU
accession talks, cozying up instead to China and Russia as well as to Greenland and the Faroe Islands
– Strict capital controls: No end in sight
Collapse
Ten largest corporate bankruptcies of all time (USD billion)
Source: Financial Supervisory Authority of Iceland.
Collapse
Interest rate spread(1961-2009, lending rate minus deposit rate, %)
Nordics 1970-2009 Periphery 1961-2005
19701973
19761979
19821985
19881991
19941997
20002003
20062009
-15
-10
-5
0
5
10
15
DenmarkFinlandIcelandNorwaySweden
19611964
19671970
19731976
19791982
19851988
19911994
19972000
2003
-15
-10
-5
0
5
10
15Greece
Iceland
Ireland
Portugal
Source: World Bank World Development Indicators.
Without foreign competition,
Iceland’s bank privatization
failed to reduce spread
Collapse
In Ireland, Portugal, and Greece,
local banks face foreign competition
Bank nonperforming loans(2000-2012, % of gross loans)
Nordics Periphery
20002001
20022003
20042005
20062007
20082009
20102011
20120
5
10
15
20
25
30
35
40
45
Denmark
Finland
Iceland
Norway
Sweden
20002001
20022003
20042005
20062007
20082009
20102011
20120
5
10
15
20
25
30
35
40
45Greece
Iceland
Ireland
Portugal
Source: World Bank World Development Indicators.
Iceland’s banks: Still in a
class by themselves
Collapse
Bank assets(1990-2011, % of GDP)
Nordics 1990-2011 Periphery 1995-2011
19951997
19992001
20032005
20072009
20110
100
200
300
400
500
600
700
800
900
1000Greece
Iceland
Ireland
Portugal
19901992
19941996
19982000
20022004
20062008
20100
100
200
300
400
500
600
700
800
900
1000Denmark
Finland
Iceland
Norway
Sweden
Irish government, unlike the Icelandic one,
decided to bail out the banks, at huge cost
Collapse
Iceland did have a banking crisis
in 1989-1991; it was covered up
General government gross debt (2001-2012, % of GDP)
Nordics Periphery
20012002
20032004
20052006
20072008
20092010
20112012
0
20
40
60
80
100
120
Denmark
Finland
Iceland
Norway
Sweden
20012002
20032004
20052006
20072008
20092010
20112012
0
20
40
60
80
100
120
140
160
180
Greece
Iceland
Ireland
Portugal
Collapse
Iceland: Sovereign default? Hardly.
Another rescue by IMF? Possibly.
Periphery: Banking crises vs. fiscal crises
Fiscal measures 2007 (% of GDP) Bank assets 2007 (% of GDP)
Greece Iceland Ireland Portugal0
20
40
60
80
100
120
140
Central government debt
General government expenditure
Greece Iceland Ireland Portugal0
100
200
300
400
500
600
700
800
900
1000
Greece and Portugal:
Crisis spread from
budget to banks
Iceland and Ireland:
Crisis spread from
banks to budget
In 2012, ca. half of Irish households had negative equity in their houses compared with about a quarter of Icelandic households
Iceland 2008 vs. Faroe Islands 1989
Iceland• Root cause: Corruption, esp.
incestuous relations among banks, business, and politics
• 2009-2010: GDP fell 10%• No significant emigration yet,
this may change• Króna fell by 33% in real terms• Promised constitutional
reform, but did not deliver, ignored national referendum
• Limited trust: From cohesion to contempt
Faroe Islands• Root cause: Corruption, esp.
incestuous relations among banks, business, and politics
• 1989-1993: GDP fell 33%• 20% of population fled, half of
which returned later• Fixed exchange rate, tied to
Danish krone one-to-one• Promised constitutional
reform, but did not deliver, did not hold national referendum
Essentially same story
Final comparison
Iceland 2008 vs. Faroe Islands 1989
Iceland• Root cause: Corruption, esp.
incestuous relations among banks, business, and politics
• 2009-2010: GDP fell 10%• No significant emigration yet,
this may change• Króna fell by 33% in real terms• Promised constitutional
reform, but did not deliver, ignored national referendum
• Limited trust: From cohesion to contempt
Iceland: Trust in parliament
20032004
20052006
20072008
20092010
20112012
20130
5
10
15
20
25
30
35
40
45
50
To heal, as every doctor knows,
wounds must first be cleaned.
Final comparison