International business group project editing phase
International Business ADM 3318DIceland vs. Ireland and the Economic Crisis of 2008: Too Big to Fail? What a Loadof Baloney!Presented to Professor Pranlal Manga, Ph.D, M.Phil.Written by:Tessum Weber 5414170Connor Welsh 5673719Preston Williams 5684725Monilla Umubyeyi 6081768
Table of ContentsIntroduction……………………………………………………………………………………...1Information on each Country before Financial Crisis……………….………………………..1Ireland’s Financial Standing in 2007……………………………………………………1-3Iceland’s Financial Standing in 2007…………………………………………………...3-5The Global Financial Crisis of 2008….…………………………………………………………6Specific Weaknesses in Economies around the World……………….………………...6-8The Ripple Effect………………………………………………………………………8-11The Impact of the Crisis on Ireland and Iceland……………………………………………..11Immediate Impact of Crisis on Ireland……………………………………………….11-12Immediate Impact of Crisis on Iceland……………………………………………….12-13Comparison of Various Factors between both Countries…………………………….13-15Comparison Looking at the Survival Plan between Iceland and Ireland…..………………16Ireland’s Proposed Survival Plan…………………………………………………….16-17Iceland Proposed Survival Plan………………………………………………………17-18Comparison between both Countries..………………………………………………..18-20Where Are They Now? ...............................................................................................................21Economic Standing of Ireland and Iceland in Present Day……………………………...21Comparison Based on Data and Charts………………………………………………21-22Outlook of Future for the Countries………………………………………………….23-25Conclusion………………………………………………………………………………………25
Economy of Iceland before the CrisisBefore the financial crisis that hit Europe in 2008, Iceland had one of the strongest countries interms of economic prosperity. Iceland adopted a Scandinavian-type social-market economycombining a capitalist structure and free-market principles with an extensive welfare program,which as a result, ranked Iceland in 5thin the 2006 Index of Economy Freedom. (EUbusiness,2010)Iceland’s economy depends heavily on the fishing industry, due to its geography situation. Priorto the crisis, the fishing industry provided 40% of export earnings, more than 12% of GDP, andemployed 7% of the work force. (EUbusiness, 2010)According to the Central Bank of Iceland’s 2005 report, the country has extensive hydro andgeothermal resources, the only country in Western Europe to do so. Electric power potentialfrom hydro and geothermal sources created a positive impact in the country’s economy. As aresult, Iceland is a world leader in the use of geothermal energy for domestic and industrialpurposes, not only for generating electricity. This factor has led to the growth of Iceland’smanufacturing sector. In 2004, manufactured products represented 36% of the total productsexported. Many small and medium-size companies had emerged in export-orientedmanufacturing; areas such as medical equipment, pharmaceuticals, capital goods for fisheriesand food processing, and most of these companies are founded on product innovation. (TheCentral Bank of Iceland, 2006)The largest manufacturing industry in Iceland is the aluminum smelting. This industry is mainlybased on competitive costs and a highly educated and skilled labour force. With the Abundantgeothermal sources in Iceland, the country attracted a lot foreign investment in the aluminum and
hydropower sectors and boosted economic growth before the financial crisis. (The Central Bankof Iceland, 2006)The Central Bank estimated that about one-fifth of the total land of the country is suitable foragriculture and farming. About 6% of this land area is cultivated, with the remaining onesdevoted for factory farming or left undeveloped. Due to the country’s small land mass, meat anddairy products are mainly kept for domestic consumption. The principal crops have been hay,potatoes and other root vegetables. Vegetables and flowers are mainly cultivated in greenhousesheated with geothermal water and steam. However, the agricultural sector went under severalstructural changes in recent years before the economic crisis. The demand for traditionalproducts, such as lamb meat, beef and root vegetables, has declined or remained constant whileconsumption of white meat (pork and poultry) has risen in line with changes in taste of thepopulation and relative international market prices. This had led the government to replace theprice support and export subsidies for the traditional products of sheep and dairy farming withsubsidies in the form of direct income payments to farmers in these segments. The Central Bankpointed out that Icelandic agriculture is the most heavily supported and subsidized in the world.However, the support is very uneven and nearly all goes to the dairy and sheep segments in orderto help the local traditional industry maintain its practice. The Central Bank proved this fact bypointing out that in 2004, direct payments from the state amounted to an estimated 46% offarmers’ income in lamb and mutton production and 46% of the producers’ price for milkproduction. The total on-budget transfers to the farmers amounted to about 1.9% of GDP in2004, compared to 1.25% in the EU and 1.2% in the OECD. The government wants to protectthe local traditional agricultural industry and consumers, the importation of meat, dairy productsand vegetables that compete with domestic production are subject to high tariffs, controls to
prevent diseases, and quotas. Imports are likely to increase as tariffs go down in line with WTOagreements on trade in agricultural products. (The Central Bank of Iceland, 2006)Iceland’s banking system played a central role that led to the financial crisis. Prior to the crisis,Icelandic banks expanded aggressively overseas (following financial deregulation), acquiringassets far in excess of the countrys GDP and therefore of the governments capacity to rescuethem in the event of a run on accounts. Consumers and businesses also borrowed heavily inforeign-currency loans, following the privatization of the sector in the early 2000s. These factorseventually led to the depreciation of the country’s currency, the Icelandic kronur, in 2008.(EUbusiness, 2010)In an overview of the country’s economy before 2008, the GDP in terms of purchasing powerparity was 12.85 million with a GDP per capita of $42,600, and a real GDP growth of 6%. TheIcelandic labour market had been one of the highest participation rates among OECD countries.Over the past 10 years before 2007, it had consistently been, well above 80%. Theunemployment rate before the crisis was only 1.6%. The exchange of Icelandic kronur was62.982 in 2005, 70.195 in 2006, 63.391 in 2007, per U.S. dollar. Since the crisis in 2008, theexchange rate raised to 85.619 and 128.417 in 2009. (EUbusiness, 2010)The Economy of Ireland, before the 2008 CrisisIreland has been a member of the European Union since 1999, which as a result, dictates the euroas it’s monetary currency. From 1990 until 2007, Ireland experienced a huge economic growth.This economic growth period was given the name “Celtic Tiger”. According to the TravelDocument System, during this period, mainly from the years between 2004 and 2007, the Irisheconomy generated roughly 90,000 new jobs annually, attracting over 200,000 foreign workers,
mostly from the new EU member states; in an unprecedented immigration influx. Theconstruction sector played the main role in this increase of employment, as one-quarter of thesejobs was construction related. Also during this same period, a strong relationship with the UnitedStates played another big factor. In 2007, U.S. exports to Ireland were valued at $9 billion, whileIrish exports to the U.S. totalled $30.4 billion (according to the Bureau of Economic Analysis).To explain this rapid growth of economy, many economists praised the Irish government forimposing a low corporate tax rate. According to economists, the country has pursued a lowtaxation policy since 1956 because the government wants to encourage more foreign directinvestment and promote free trade. (Travel Document Systems, 2009)According to the US tax journal Tax Notes, due to the low corporation tax rate, Ireland is theworlds most profitable country for US Corporations. This statement is supported by the fact thatthe profits made by US companies in Ireland has doubled between the year 1999 and 2002, from13.4 billion euro to 26.8 billion. In 2005, US companies accounted for 61% of Ireland’s totalexports. Other than the low tax rate factor, the flexibility of English-speaking workforce;cooperative labour relations; political stability; pro-business government policies; a transparentjudicial system; strong intellectual property protection; and the pulling power of existingcompanies operating successfully, are also important factors that explained the creation of the“Celtic Tiger”. (Travel Document Systems, 2009)The main sector that excel in Ireland’s exportation, is the mining industry. Since the discovery ofthe giant ore deposit at Tara Mine in 1977 and two other underground mining operations inLisheen and Galmoy, the country now ranks as the seventh largest producer of zinc concentratesin the world, and the twelfth largest producer of lead concentrates. The combined output fromthese mines, three of Europe’s most modern and developed mines, make Ireland the largest zinc
producer in Europe and the second largest producer of lead. According to Irish NaturalResources, Tara Mine produces over 2.6 million tons of ore every year, while Galmoy mineproduces 650,000 tons of ore annually, and 330,000 tons for Lisheen. In 2007, the exportation ofmining products represented 19% of Ireland’s exports, and a major exporter of zinc in EU. (IrishNatural Resources, 2008)Another sector that Ireland excelled in exportation is the software industry. According to SpiegelInternational, the country exported software products that worth 14 billion euro in 2003. Whatmade the country became the world’s software export champ is once again, the low corporate taxrate, plus the friendly business environment that attracted several foreign IT companies, notablyMicrosoft, to invest in the country, thus given the country this honorific title. (SpiegelInternational, 2005)Agriculture represented 8.4% of the export, mainly to the United Kingdom.Beside export, the government’s welfare benefit programs also contributed to this economygrowth before the crisis. According to Finfacts, Ireland’s net unemployment benefit was the thirdhighest of the OCED countries (Finfacts Ireland, 2009).In an overview of Ireland’s economy before the financial crisis, in 2007, the country’s nominalGDP was $186.2 million, real GDP growth is 5.3%, nominal GDP per capita was $43,100,agriculture represented 5% of GDP, industries, such as construction, mining, computer,represented 46% of GDP. Exports accounted for $115.6 billion, while imports accounted for$84.2 billion. (Travel Document Systems, 2009)
The Global Financial Crisis of 2008In the year 2008, the world experienced a severe financial crisis so devastating that it wasdescribed by the International Monetary Fund (IMF) as being “by far the deepest globalrecession since the Great Depression” [IMF]. The financial crisis was truly global, affecting amultitude of countries in various ways and with diverse levels of magnitude. The crisis was notthe cause of a single, sudden event but rather a series of events spaced throughout nearly adecade. It was the unfortunate combination and sequence of these events that ultimately causedthe global economy to tumble. In identifying the main sources of the crisis, experts haverecognized particular causes that attributed to the development of the financial disaster seen fromthe time of the outbreak in 2008 to present day [The Global Financial Crisis]. As the causesoccurred, their negative effects continuously grew and their overall impact increasedexponentially. “Many observers portrayed the turmoil in financial markets in terms of a ‘dominoeffect.’ ”[Journal of Balkan & Near Eastern Studies]. This sequence of negative eventsdramatically impacted numerous countries, including Ireland and Iceland, on a national level bycausing them to enter a recession cycle. The Financial Crisis of 2008 is one that will be felt foryears to come ….. [add some sort of thesis statement]The Domino EffectBoth literally and figuratively, it is possible for a small spark to ignite a roaring fire. It isa common characteristic among human-beings to label the “spark” that “ignited the fire” as beingthe most prominent factor or the leading cause of a specific result. In the financial crisis, theactions of the USA were essentially the “spark” that “ignited the fire” of the global financialcrisis.
The roots of the crisis began in the world’s largest national economy, the USA. Duringthe early years of the 21stcentury, the American population began to invest heavily in houses. Asmore and more individuals purchased houses using borrowed money, the overall value of thehousing market grew and questionably grew too much. Price inflation of this type is oftenreferred to by economists as a “bubble”. William Watson stated in the Gazette in 2006, that: “Abubble... is a run-up in prices going beyond anything that reasonable economic calculation canjustify.” Watson added that “when enough people do finally recover their senses... [the] bubblebursts” [The Global Financial Crisis]. Essentially, Watson described the exact situation thatoccurred in the USA in the subprime mortgage crisis of 2007. Banks in the USA were now in anunstable situation. The banks had provided the funding to the Americans who invested in thehousing market. With the drop of house values and slowing down of the economy, theseindividuals were now unable to pay their mortgages and went bankrupt. The strain from theseunpaid mortgages caused major banks in the USA to fail. Specifically, Bear Stearns, Fannie Mae,Freddie Mac, Washington Mutual, AIG were among the major banks and corporations to failduring the subprime crisis [The Global Financial Crisis]. The IMF described this subprimecrisis as being severe enough to cause the “global economy [to bend] but [not enough to] buckle”[IMF]. The subprime mortgage crisis was the first major event that would eventually lead to theglobal financial crisis a year later. The actions of the USA would become the “spark” that wouldlater “ignite the fire” of the Global Financial Crisis of 2008.The subprime mortgage crisis that occurred in 2007 caused the ‘domino effect’ process tobegin, and soon led to the appearance of a series of events around the world. Investors and banksaround the world had invested money in the US housing market. When the housing bubble
popped in the US, the housing bubble is several countries almost instantly popped as well. Thusmany banks around the world felt the same strain as those in America. “As a result, in October2007, the German government was forced to spend $50 billion to prop up the bank Hypo RealEstate. Around the same time, Iceland nationalized, or imposed government control of, thecountrys second largest bank. In February 2008, the British government also had to nationalizeone of its major banks.” [The Global Financial Crisis] The bank crisis that now transpired inseveral countries across the world left the general public in a state of confusion and uncertaintyand would lead the global market through another step in the progression cycle.Liquidity CrisisAnother element during the financial storm that erupted from the years 2007-2008 dealtwith a notion of liquidity. Liquidity is the ability to convert an asset into cash to use in othertransactions. Around the world, businesses rely on banks as a method for liquidation. But, asChris Arnold noted in an October 2008 story for National Public Radio (NPR), “banks arealready short of cash because of losses in the housing bust, so theyre a lot less willing to lendmoney to everybody else.” [The Global Financial Crisis] As businesses now face numerousproblems stemming from an inability to liquidate, they begin to fail. As businesses fail, workersaround the world are laid off and universal unemployment rises. A liquidity crisis is not onlydangerous because it causes credit to dry up, but also because it poses the threat of transforminginto a solvency crisis. This crisis was demonstrated in late 2007 when the American mortgagelender, Country Wide Financial, went bankrupt and the British Mortgage lender, Northern Rock,had to be bailed out by a loan from the Bank of England.
From Bad to WorseOn September 15th, 2008, the global financial crisis reached the boiling point. The datemarks the failure of the American mid-sized investment bank Lehman Brothers. This singlefailure alone unleashed a feeling not only on Wall Street, but across the globe. “Stock pricesplunged, interbank markets dried up again, the commercial paper market came to a standstill andeven money market funds experienced serious problems.” [Fighting Financial Fires] Thetumble of the Lehman Brothers caused the global market to dive deeper in an already desperatetime. Mentioned earlier, it is said that a single “spark” can ignite a “roaring fire”. On September15th, 2008, the failure of the Lehman Brothers marked the beginning of the global financial crisis.Although it is only one of the small causes for the global crisis, the event concerning the LehmanBrothers will be remembered as being the spare that ignited the roaring fire.“Financial markets operate in a climate of uncertainty in which – as is well known –greed and fear battle for the upper hand.” [Fighting Financial Fires] The global economy wasnow in a time when fear dominated and it showed simply by the mass amount of confusion,uncertainty, and the lack of faith, by people in various economies. It can be accepted that themain causes of the crisis were triggered directly in the subprime mortgage crisis a year prior.However, it must also be noted that it was not the only cause. The global financial crisis wasultimately a sequence of unfortunate events. As a result of the financial crisis, banks and otherfinancial institutions demonstrated a tendency to follow each other. Their actions can almost becompared to those of lemmings, who in a time of fear will simply panic and follow the herd…even if it means running directly off a cliff. Although this behavioural quality is interesting, it isconstantly expressed throughout human beings from the past, present, and likely the future. The
blame of the financial crisis cannot be limited to a single event. Ultimately, it was the result of a‘domino effect’ that led one event to another. The domino effect led the overall global economyfrom a time of prosperity to a time of poverty.The 2008 Financial Crisis - What were the effects on Iceland and Ireland?Iceland and Ireland have been overwhelmed by the impact of their respective financial crisis. Inorder to make a comparison of the impact of the crisis, it is important to recognize the size ofboth countries in discussion. Iceland is a minuscule country compared to Ireland, withpopulations of around 300,000 and 4.47 million, respectively. In regards to the burst of theirasset, property, and banking bubbles, the people of Iceland used foreign currency to capitalize onforeign places. On the other hand, the Irish decided it was a better strategy to use foreigncurrency to take over Ireland.Iceland:Compared to the country’s extravagant situation before 2007, Iceland underwent a paramountdownturn. Accordingly, Iceland was forced to withstand and recover from serious effects fromthe burst of its asset bubble followed by the rapid collapse of its three largest banks-Islandsbanki, Kaupthing, Glitner- by mid-October 2008. The impact was enormous and was feltthroughout the country.After the fall of the Lehman Brothers in the U.S., the Central Bank of Iceland and the Icelandicbanks themselves began to realize the vulnerability of the banks. The strength and size of thebank’s assets were extremely large in relation to the size of Iceland’s economy. In the first halfof 2008, the króna - Iceland’s currency – experienced vast depreciation relative to the euro and
the U.S. dollar and continued to do so more prominently after July 2008. According to PoulThomsen, IMFs mission chief for Iceland, , the krónas value dropped by more than 70 percent,and the stock market lost more than 80 percent of its value within a week of the collapse of thethree banks. The króna continued to depreciate to nearly 100 percent after that. An immediatedepreciation in currency for a small country such as Iceland, which relies heavily on trade,increases the costs of its imports and threatens to drive domestic inflation in one direction:upwards. In fact, inflation rose to nearly 12% in the first half of 2008, and to 17.1% byNovember, and peaked at 18.6% at the year’s end (U.S. Department of State, 2011; BBC, 2009).Consequently, the extreme devaluation of the króna effectively doubled foreign currencydenominated debt while inflation increased the pressures of debt in Iceland’s economy.For Iceland’s three largest banks, this collapse in short-term borrowing meant that they found itwas too difficult to finance their debts or find funding from the international market. Therefore,they turned to their last resort, the Central Bank. At this period of time, the three banks had adebt that amounted to ten times the country’s gross domestic product (GDP), which was €14.7billion in 2007. Nationalization was no longer an option because the government and the CentralBank could not guarantee the whole balance sheet of the three banks, whose pre-crisis total was€110bn, as reported by the Iceland Chamber of Commerce in 2009. Naturally, investorsrecognized the dangers and began to flee the banks. There was no doubt that the three majorbanks in Iceland were too big to rescue. Moreover, a new emergency law that was passed onOctober 6 had the three banks nationalized. They were to be taken over by the IcelandicFinancial Supervisory Authority (FSA), which is an independent state authority whoseresponsibilities are to regulate and supervise Iceland’s credit, insurance, securities, and pension
markets (Jackson, 2008). Furthermore, the FSA were given powers to suspend payments inorder to safeguard value and protect depositors, and powers to establish “new” banks- newGlitner, new Landsbanki, new Klaupthing- to overtake domestic deposit obligations and assetsfrom the three failing “old” banks. Additionally, controversy between Iceland and the U.K.sparked negative media coverage around the time of the banks’ downfall. Before the crisis, inIceland’s prime, net government debt was close to zero. Afterwards, deposit insurance from thefailing banks proved to have a massive impact. The cost of insurance of international deposits ofIcelandic banks became greater than €4 billion (Iceland Chamber of Commerce, 2009). It wasreported that the amount owed to UK taxpayers alone in failed Icelandic banks was near £1bn(BBC, 2009). In early October, the British government approved anti-terrorism legislationagainst Iceland- including the three banks, the Central Bank, and the Icelandic government- inorder to freeze Icelandic bank’s U.K.-based assets.Citizens took to the streets with pots and pans, set fires and protested in order to express greatoutrage with their government because of the mass layoffs and unemployment, reaching as highas 9% at the time which greatly affected disposable income (Benediktsson, Karlsdóttir, 2011).Moreover, export sectors continued to perform well and as a result, are more competitive afterthe crisis; employment levels in the fisheries communities- seen as a last resort during the assetbubble- stayed high despite the crisis, but the situation was slowly worsening. Likewise,construction and service-based jobs have been harmed. The banking crisis, along with thedepreciation of the krona and inflation, has taken a toll on Iceland’s household market, leavingfamilies and individuals, many of whom are unemployed, with a debt that costs more than thevalue of their house. According to data from the Central Bank, approximately one-third of the
home-owners will have debt worth more than their houses, and out of the 67,000 homeownerswith króna denominated mortgages, 11,200 households are in negative equity. Thereof 2,600have more than 5 million króna in negative equity . The data also states that out of the 8,900households with foreign currency mortgages (in full or partly), 3,400 are in negative equity.Thereof 2,400 have more than 5 million króna in negative equity (Central Bank of Iceland,2009). 90% of Icelandic families own their homes; however, as a result of the heavy loan burden,many will not keep ownership and may be forced to flee. Evidently, mortgage debt constitutes thelargest share of household liabilities. Houshold liabilities have more than doubled for 43% of householdswith foreign currency mortgages and risen more than 50% for half of households with mixed mortgages(Ólafsson, 2009).Ireland:Among the many European countries that have experienced a financial crisis, Ireland is a topcontender for having gone through the worst. Similar to Iceland, Ireland was experiencingprosperity before the crisis. As with Iceland, the bankers and the government did not properlyasses the strength and size of their banking debts. In late September 2008, the Irish governmenthad assured investors that the banks were strong and liable for their actions by guaranteeing thedeposits and debts of the six largest financial institutions. This guarantee covered all types ofdebt ranging from retail and corporate deposits, and interbank deposits to covered bonds andsenior unsecured debt. This guarantee created a liability for the state of approximately 200% ofGDP (Connor, Flavin, O’Kelly, 2010). Unfortunately, one of the principal banks in Ireland, theAnglo-Irish bank, was in a hopeless position and clearly unable to refinance its short-termliabilities at that date. It faced astonishing losses amounting to €34 billion. The Anglo-Irish bankmade large-scale commercial loans mainly to Irish property developers, nearly reaching €72billion. Evidently, they had lost nearly half of their investments and so they were forced to resort
to borrowing from the European Central Bank (ECB). Two other major banks, Bank of Irelandand Allied Irish Banks (A.I.B), were also experiencing a bust; however, there was less talk aboutthem. They loaned large sums to Irish property developers and homebuyers, and as a result, theirlosses were also large. In total, the losses of all the Irish banks approached €106 billion.Although already in a formal recession, it was only until 2009 that Ireland nationalized thebanks. The National Asset Management Agency was created to purchase their mountain of debt.Consequently, the budget fell deep into deficit for the next two years and forced the public to paythrough increases in taxes, social welfare cuts, and pay cuts for the entire public sector.With property value declining and unemployment on the rise, the Irish citizens furiously beganto occupy the streets. Unemployment levels were up to around 11% by February 2009, and stillcontinue to rise (BBC News, 2011). The previously ruling party, Fianna Fail, had already begunto see its support decline and was eventually ousted. As has happened in the past, many of theIrish had decided it was a good time to leave their homeland. Ireland’s Central Statistics Officepredicted that 100,000 people will emigrate from 2011 to 2012; this is more than twice theemigration in 2009 and 2010 and will exceed their historical peak in 1989 when 44,000 peopledecided to abandon Ireland (Chazan, 2011). This sharp increase in emigration of Irish nationalsmarks the occurrence of yet another “brain drain”, where the educated Irish will have to seektheir fortunes elsewhere.After analyzing the impacts of the two crises, it appears that they both suffered enormouslybecause of the burst of their asset, property, and banking bubbles. Instead of being too big tofail, the banks in Iceland and Ireland were clearly too big to rescue. Arguably, it may seem thatIceland had to deal with worse effects as it is the smaller player with the amount of debt fit for a
massive country; however, Ireland’s situation is not to be taken lightly and this can still bedebated.The Survival Plans of Ireland and Iceland: How did the two countries survive the economiccrisis?Ireland:Ireland, once dubbed the “booming economy; the celtic tiger” (“How the Celtic Tiger lost itsroar”, The Vancouver Sun, July 2nd, 2011), had to come up with a plan to survive the onslaughtbrought on by the 2008 financial crisis. As the reader will see, Ireland’s survival plan differedgreatly to that Iceland’s. Although both countries did rely on loans from the IMF and variouscountries (as we will see later on), their methods in handling the crisis differed greatly. In thesetwo cases, the ideology of “too big to fail” was put to test.The government of Ireland’s survival plan was to spend. Immediately after the collapseof the Lehman Brothers, on september 30th 2008, the government of Irelandimplemented a massive spending program. The first order of business was to guaranteethe liabilities of six Irish-owned lending institutions as well as one foreign owned bank.The guarantees covered “440 billion euros of liabilities”. (The Telegraph, “Ireland’sbanking crisis: timeline”, March 31st 2011). Furthermore, massive bank injections andnationalizations were then routinely performed during the crisis, including:- €5.5bn to the country’s three main lenders (December 21st 2008) (The Telegraph,“Ireland’s banking crisis: timeline”, March 31st 2011)- €7bn into Bank of Ireland and Allied Irish Bank, and a 25% stake in both banks(February 11th 2009) (The Telegraph, “Ireland’s banking crisis: timeline”, March 31st 2011).
- Ireland announces the creation of a “bad bank” to absorb the toxic loans from Ireland’sfinancial institutions, worth €77bn at an average discount of 30% (Aril 7th 2009). (TheTelegraph, “Ireland’s banking crisis: timeline”, March 31st 2011)The total bailout costs amount to €45bn by Septmeber 2010. (BBC News, “IrelandTimeline”, October 31st 2011).During this turbulent time, unemployment hits 11% (february 2009) and The IrishRepublic looses its AAA credit rating (March 2009). Looking for “foreign” assistance, theIrish government agreed to an €85bn rescue package from the IMF and the EU (BBCNews, “Ireland Timeline”, Monday, October 31st 2011).The €85bn rescue package was composed of the following contributions:- A €17.5bn contribution from the Republic of Ireland, stemming from cash reserves andcontroversially, the National Pension Reserve Fund.- A €22.5bn contribution from the IMF- A comparable amount from the EFSF (The european financial stability facility)- Contributions stemming from bilateral loans; from Sweden, the UK and Denmark.(BBC News, “Q&A: Irish Republic bail-out”, November 29th 2010)Although the bailout was eventually implemented with a 6% interest rate, the rate waslowered to 3.5% on July of 2011, effectively lowering borrowing costs by €600m -€700m per year. (BBC News, “Ireland’s bailout interest rate reduced by EU leaders”,July 22nd, 2011).Iceland:
Iceland’s approach to deal with their massive debt was significantly different. When the2008 crisis hit the Icelandic economy, “the banking sector had grown to ten times thesize of the economy” (BBC News, “Waking up to reality in Iceland”, January 26th 2009,Jon Danielsson). Iceland had effectively become banking economy. With a over $62 billion offoreign debt in the three largest icelandic banks (The New American, “Lesson fromIceland’s 2008 Financial Crisis: Let Banks Fail”, Bruce Walker, 9 November 2011),Iceland adopted the completely different survival approach: Let’s “Bankrupt our way torecovery” (BBC Radio 4, “Could Iceland be a model for debt-ridden Europe?”, JustinRowlatt, July 30th 2011). Instead of investing massive levels of capital into the economy,the Icelandic government chose to default on the majority of foreign debt, and useIMF backed injections to keep the economy afloat while a restructuring took place.Starting in 2008, the government immediately took action:- In the fall of 2008, the government took control of the Icelandic banks, who faced shortterm funding problems. (BBC News, “Timeline: Iceland economic crisis”, February 2nd2009).- By October 2008, the three largest banks defaulted on $62 billion of foreign debt, thenwent into bankruptcy, not bailed out by the iceland people. (The New American,“Lesson from Iceland’s 2008 Financial Crisis: Let Banks Fail”, Bruce Walker, 9November 2011)- On October 20th 2008, the Icelandic Financial Authorities announced the “re-establishment or new” top three banks (Glitnir, Landsbanki and Kaupthing). (BBC News,“Timeline: Iceland economic crisis”, February 2nd 2009).
- By December of 2008, the IMF worked with Iceland to develop of loan packageconsisting of; $2.1 billion from the IMF, $200 million from Poland, $500 million from theFaeroe Islands, and $2.5 billion from several nordic countries, including Finland.(Youtube video from the IMF, “The Iceland Financial Crisis Explained, posted Dec 24th2009)From 2008 - 2011, The IMF backed program aimed to “Stabilize the krona”, in order tostop defaults in “corporate and household sectors”, assist the Icelandic government torestructure it’s banking sector and stabilize the economy. (IMF, IMF Survey Magazine:Interview, “Iceland Gets Help to Recover From Historic Crisis”, Camilla Andersen,December 2, 2008). The program was broken into capital injections on regular intervals.Each injection was subject to a review by the IMF, to ensure that Iceland was taking allthe necessary measures to ensure appropriate economic recovery. (IMF website,“Iceland and the IMF”, a timeline of all the communications between the IMF andIceland). Strict capital controls were also put into place to ensure the krona remainedstable. (Canadian Business, “Will Iceland get loonie?”, November 2nd 2011, JoeCastaldo).Who’s plan worked better?By 2009 - 2010, after both the Irish government and Iceland implemented theirrespective survival programs. The following graphs, show changes in GDP andemployment over the 2007 - 2010 period:
(The New York Times, The Opinion Pages, “The Icelandic Post-crisis Miracle”, Paul Krugman,June 30th 2010, http://krugman.blogs.nytimes.com/2010/06/30/the-icelandic-post-crisis-miracle/)
(The New York Times, The Opinion Pages, “The Icelandic Post-crisis Miracle”, Paul Krugman,June 30th 2010, http://krugman.blogs.nytimes.com/2010/06/30/the-icelandic-post-crisis-miracle/)The graphs both show that Iceland’s real GDP and employment levels witnessed lessdamage during the recession than Ireland. Iceland is clearly recovering quicker thanIreland, which faces greater levels of unemployment and GDP reductions. Adding to Iceland’sapparent success in dealing with the recession, Iceland (recently) successfully returned to theprivate debt market through the issuance and sale of 5 years bonds, at just above 3%. This sale,which successfully raised $1 billion, is proof that “financiers approved of Reykjavik’s handlingof the financial crisis and the country is on the road to recovery.” (The Wall Street Journal,Opinion Pages, “Iceland’s Banks Come in From the Cold”, Asgeir Jonsson, June 16th 2011)
Ireland has yet to prove this level of success.Where are they now?IrelandEconomic performanceAccording this year’s report, the centre piece of the financial sector effort is the creation of the nationasset management authority generally known as NAMA. NAMA has helped the bank to remove non-performing assets on their books so that they can be able to work with right assets and increase morefunctionality. Irelands economy expanded suddenly in the first half of 2011, with adjusted GDP growthof 1.9% in the first quarter and 1.6% in the second. Moreover, growth in the first two quarters of 2011easily outpaced the EU average (0.8% in the first quarter, 0.2% in the second)1. The recent transfers’balance, which reflects international flows such as payments to and from the EU and overseas aid, posteda deficit of 1.5bn euros, compared with a deficit of 2bn euros in January-June 20102.Comparative economicWith deflation in place, social benefit is falling in cash terms to keep the same real value compared to thecost of living. For workers with low salaries, unemployment benefits are reaching temptingly high levelscompared to wages3. For those out of work, there is a high risk that unemployment can become permanentunless the government encourages to return to work as the economy recover. This sector can produce botheconomic and social benefits by creating jobs, provide training, and by building local capacity4.Outlook for the next four years to comeThe USA investment has helped the Irish economy to create new jobs and with a great association withgreat brand companies such as Google and Apple. These emerging companies are going to help to recoverthe lost jobs during this year. By preventing high employment rate, the Irish government is planning toengage the employment services more actively with job seekers, providing proper training. By reviewingthe work incentive effects of other welfare benefits, the government will be able to cut governmentsspending, thus reducing the national debt. The government is planning to extend the current cut in1 http://portal.eiu.com/report_dl.asp?issue_id=378509222&mode=pdf2 http://www.oecd.org/document/9/0,3746,en_33873108_33873476_45269961_1_1_1_1,00.html3 http://www.oecd.org/document/63/0,3746,en_33873108_33873500_48842623_1_1_1_1,00.html4 http://www.nibusinessinfo.co.uk/bdotg/action/detail?itemId=5000233539&site=191&type=RESOURCES
employers’ social security contributions. Enhance the quality of education, so as to increase research anddevelopment in the country. The country is planning to restore its competitiveness in the internationalmarket.Data chartAs this chart shows the Ireland GDP growth is improving, thus giving hope that it will recover from itsfinancial crisis5.ConclusionIn short, the Public of Ireland will continue to improve and take adjustment programs to reduce the deficitand restore the banking system. As the domestic demand stabilizes, the output is expected in the course of2011, with some quickening in 2012. Although the unemployment is still high, people will set upinnovative social enterprises that meet particular needs in the communities6. In order to arrest theaccumulation of public debt and restore fiscal sustainability, it is by improving competitiveness throughincome as the structural stays the priority.Iceland5 http://www.tradingeconomics.com/ireland/gdp-growth6 http://www.oecd.org/document/9/0,3746,en_33873108_33873500_45269961_1_1_1_1,00.html
Economic structuresAccording to the OECD, the Iceland economic structure has improved considerably since 2008 financialcrisis. In this interview the economics ministry made a statement that, "Supply-driven sustainable growthmeans emphasis on increased investment in not only traditional machinery, tools and construction, butalso on social aspects such as service sector, research and development, IT and training to create morejobs," on Monday7November 14th2011. The collapse of banking sector has brought Iceland to its knees;however, the Iceland fishing industry which provides 40% of the export and tourism sector has helped thecountry to stay strong during the financial crisis.Domestic EconomyThe measurements reveal that unemployment is on a slow downward trend after having shown a smallseasonal spike at the beginning of the year. Even though the numbers show that seasonal unemploymentis now at its lowest level since before the collapse in 2008. Unemployment is expected to fall more slowlythan previously forecast because of lower growth expectations. Wage growth following the national wagebargain and weak economic activity are expected to contribute to a persistently high level ofunemployment. Labour-intensive sectors have still not regained their intended strength8.Outlook for the next four years to comeThe new economic program has set six priorities including supporting the private sector, a sustainablefiscal policy, increased emphasis in education in relation with employment, debt restructuring, businessesand households to have access to a competitive and strong financial system and a step by step ease ofcapital controls. The Iceland has strong hope to recover from its crisis; the country believes it has a strongresource base: a well-educated and hardworking dynamic level force. The IMF agrees that the Icelandeconomy will eventually turn the corner9. The IT sector has turned out to be so strong owing to theevaluation of the currency. Even though many people still experience downfalls of the crisis, thegovernment believes the Ireland is going to recover thanks to foreign investment, thus seeingunemployment less than before. The IMF is planning to bailout the Iceland by giving $5.1 bn which isgoing to be pay its debt and a recovery from the two banks that collapse.Data Chart7 http://global.factiva.com/ha/default.aspx8http://infotrac.galegroup.com/itw/infomark/681/769/167360461w16/purl=rc1_GBFM_0_A261897214&dyn=4!xrn_5_0_A261897214?sw_aep=otta779739 http://www.youtube.com/watch?v=s-4AgjapG3A
Though the GDP growth of Iceland indicates ups and downs since 2008; however, there is hope that thecountry will recover from the financial crisis10ConclusionIn conclusion, prior to the 2008 crisis, Iceland had experienced high unemployment and great imbalancesin the banking system. However, the Iceland is projecting to recover and it is expecting foreigninvestment to help restore the lost jobs for those who lost their employment during the crisis. Iceland isconsidering joining the EU and take advantage of the Euro, although the country is in fear that theEuropean partners will have control over the fishing industry11. The Iceland plans to cover the needs ofthe banking system revealed by the recent stress tests so as to restore normal bank credit flows andsupport the economic recovery.References:10 http://www.tradingeconomics.com/iceland/gdp-growth11 http://www.eubusiness.com/europe/iceland
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