The sovereign debt crises around the world rumble on. If it isn’t the UK and other European countries being downgraded or threatened with downgrades by credit rating agencies, then it’s the latest twists in the Greek saga.You’d be forgiven for thinking that it’s all doom and gloom in the bond markets.
However, some countries are having their credit ratings raised. Fitch has just upgraded Icelandic debt to BBB-. This means that all three major agencies, (the other two being Standard & Poor’s and Moody’s) consider Icelandic debt to be investment grade once again. It costs nearly the same amount to insure Belgian debt against default as it does that of Iceland’s government.
And it’s not just markets and rating agencies who are happy – Iceland’s unemployment is only 7.2%, and GDP growth is expected to come in at 2.4% this year. That’s a lot stronger than anything forecast for the UK or the rest of Europe.
So what went right for Iceland? And what can we learn from its experience?
How Iceland’s Problems Started
From 2003 to 2008, Iceland went on a debt-fuelled buying spree. Iceland’s major banks began borrowing from international lenders on a huge scale to finance asset purchases. The population followed suit, borrowing from low interest-rate countries like Japan to bet on domestic assets (the carry trade). Read More
What Iceland Did
Governments around the world bailed out their financial sectors. The US government bought stakes in key banks and lent them money. Britain nationalised RBS, assuming all its debts. Ireland guaranteed all the debts of its six largest banks.
However, Iceland took a different tack. The government declared that it would only save domestic bank account holders – everyone else would have to fight over the remaining assets.
It also refused to pay foreign governments for the cost of compensating retail depositors in foreign subsidiaries of Iceland’s banks. Although a deal that would have paid the debts, over a longer schedule, was nearly agreed twice, it finally collapse due to public opposition. Read More
