Iceland stranded in more ways than one. Eventually the fiscal drugs fail and the patient dies

Somewhere along the line, Iceland’s three major banks forgot such home truths as that, with 25 times leverage, a four per cent in decline in asset value wipes out your equity. It’s a simple thing, but even bankers get absent-minded. And now they are all defunct.

Iceland’s government, as most, liked to regulate the little things to death, while leaving the greater fiduciary questions to the pleasure of the free market — the opposite of a government’s traditional role.

From the Calgary Herald

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1 Response to “Iceland stranded in more ways than one. Eventually the fiscal drugs fail and the patient dies”


  1. 1 Carol Wainio February 10, 2009 at 10:04 pm

    Thought you might want to know about the following problems with this article:

    Warren overstates the amount of the IMF loan to Iceland by about $10 billion, among other things….

    re: “Iceland stranded in more ways than one…”, David Warren, Jan. 31 Ottawa Citizen; Feb. 3, 2009, Calgary Herald, Vancouver Sun; Feb. 6, Windsor Star.

    David Warren: “…with 25 times leverage, a four percent decline in asset value wipes out your equity”.

    Willem Buiter: “With 25 times leverage, a 4 per cent decline in the value of your assets wipes out your equity”.

    What David Warren describes as a “home truth” in connection with “Iceland’s three major banks” on Jan. 31, is almost identical to a sentence appearing on the Financial Times website by economist Willem Buiter on Jan 20. But in discussing whether Iceland’s crisis could be repeated in the UK, it is clear from Buiter’s article, that he is referring to specific UK banking figures he supplies, “giving leverage of 25.8 times (pro forma)…” (see article link below, about 10 paragraphs in). The sentence supports his research and analysis.

    Warren echoes Buiter’s theme, saying, “Britain is travelling down the same chute…Warnings of a specifically ‘Icelandic’ collapse now appear in the pages of such sober journals as the Financial Times”. This indicates that he may be familiar with Buiter’s article on the same topic, but Warren does not credit Buiter, and uses the phrase in relation to Iceland’s banks, although Iceland’s actual rates of leverage are presumably higher than the 25 times noted by Buiter for the UK).

    Warren’s error: “True, they (Icelanders) lived a thousand years in those conditions, but that was when there were still fish, and before the entrancing glister of post-modernity. Moreover, they were not in hock, for at least $40K per head — for just the last IMF loan — on top of levels of consumer debt outpacing even the earnings that have since been lost…”

    Here Warren says Icelanders are now “in hock, for at least $40K per head — for just the last IMF loan…”. With a population of 300,000 (which Warren cites), at $40K per head, this would make the IMF’s single, unprecedented loan to Iceland $12 billion. Iceland’s IMF loan is clearly listed in reports as $2 billion, making the “per head” cost to Icelanders about $7K (see “IMF approves $2.1bn Iceland loan”: BBC, and other links). This should be corrected. One might also ask if Warren was aware of Buiter’s article and if so, whether attribution might have been offered.

    http://www.ottawacitizen.com/news/Stranded+more+ways+than/1237711/story.html

    http://blogs.ft.com/maverecon/2009/01/can-the-uk-government-stop-the-uk-banking-system-going-down-the-snyrting-without-risking-a-sovereign-debt-crisis/

    http://news.bbc.co.uk/2/hi/business/7738874.stm
    http://www.nytimes.com/2008/10/25/business/worldbusiness/25iceland.html?partner=rssnyt&emc=rss
    http://www.imf.org/external/np/sec/pr/2008/pr08256.htm
    http://www.upi.com/Business_News/2008/11/20/Iceland_secures_21_billion_IMF_loan/UPI-87391227186329/

    I wouldn’t personally put much stock in this author, He has had to retract a number of similar errors last year, and there are many more awating correction.

    Regards,

    Carol Wainio


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