Back in 2008 and 2009, the UK and Irish governments threw serious amounts of tax payer money to bail out financial institutions that were considered “too big to fail” – Northern Rock, Royal Bank of Scotland, Anglo Irish amongst others. The peak cost to the UK tax payer was £1.2 trillion (though around £750bn has been paid back to date). Ireland had to receive a €67.5 billion aid package from the EU and IMF to stave off financial collapse in 2010.
Contrast this to the situation in Iceland in 2008. In late September 2008, it was announced that the Glitnir bank would be nationalised, this was swiftly followed by Landsbanki and Kaupthing. At the end of the second quarter of 2008, Iceland’s external debt was 9.553 trillion Icelandic krónur (€50 billion), compared with Iceland’s 2007 gross domestic product of 1.293 trillion krónur (€8.5 billion).
The debts of the Icelandic banks had ballooned to such an extent due to an orgy of acquisitions and commercial property deals that went wrong that although they were placed under state control, a bail out was not possible without bankrupting the country and the banks creditors were left to stomach huge losses.
Looking at the comparative impact on GDP, the Icelandic approach, whether forced or not, seems to have left the country in a much stronger position than both Ireland and the UK. The IMF amongst others has expressed surprise at the strength in the rebound of the Icelandic economy (check out http://www.thestreet.com/story/11665082/1/iceland-was-right-we-were-wrong-the-imf.html?cm_ven_int=morej.)
“Too big to fail” turned into “too big to bail” for Iceland! Not so good for Icelandic bank’s creditors, but better news for its citizens perhaps? A short term blip on a longer term path…maybe..but food for thought for Greece in particular..?
Contrarian investor UK