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Monday, October 13, 2008

The Face Of Reality

I know that all this whatever seems excessive to many people, but this article on Iceland's situation explains why we need a whole lot of whatever:
``We have had crazy days for a week now,'' said Johannes Smari Oluffsson, manager of the Bonus discount grocery store in Reykjavik's main shopping center. ``Sales have doubled.''

Bonus, a nationwide chain, has stock at its warehouse for about two weeks. After that, the shelves will start emptying unless it can get access to foreign currency, the 22-year-old manager said, standing in a walk-in fridge filled with meat products, among the few goods on sale produced locally.

Iceland's foreign currency market has seized up after the three largest banks collapsed and the government abandoned an attempt to peg the exchange rate. Many banks won't trade the krona and suppliers from abroad are demanding payment in advance. The government has asked banks to prioritize foreign currency transactions for essentials such as food, drugs and oil.
Iceland has to import almost everything else than meat - food, clothing, hardware, machinery, drugs, lighting, oil, etc. The IMF is going in because Iceland's big banks and currency have just about collapsed.

Europe has not developed a regional solution, exacerbating the quiet worries that had always existed about the durability and viability of the union when stressed.

This WaPo article gives more background and context, and explains some of the implications:
The ramifications of Iceland's misery are probably more serious than people realize. The country's bank assets are more than 10 times greater than its gross domestic product, so the government clearly cannot afford a bailout. This is going to be a large default, affecting many parties. In the United Kingdom alone, 300,000 account holders face sudden loss of access to their funds, and the process for claiming deposit insurance is not entirely clear.

But there's a broader concern. With European governments turning down his appeals for assistance, Iceland's prime minister, Geir Haarde, warned last week that it was now "every country for itself." This smacks of the financial autarchy that characterized defaulters in the financial crisis in Asia in the late 1990s. Similarly, when Argentina defaulted on its debt in 2001-'02, politicians there faced enormous pressure to change the rule of law to benefit domestic property holders over foreigners, and they changed the bankruptcy law to give local debtors the upper hand. In Indonesia and Russia after the crises of 1998, local enterprises and banks took the opportunity of the confusion to grab property, then found ways to ensure that courts sided with them.
In addition, we're now likely to see substantially more defaults and credit panics in smaller countries and emerging markets. After Iceland's fall, every creditor to other nations with large deficits and substantial external debt must be looking for ways to reduce its exposure. The obvious risks include much of Eastern Europe, Turkey and parts of Latin America. Russia's difficulties show that seemingly solvent countries can be high-risk: While the Russian central bank has gold and foreign exchange reserves of $556 billion, the private sector has recently built up an estimated $450 billion of debt. Creditors don't want to roll over the debt, so the government is using its reserves to do it. It has already ordered $200 billion channeled through state banks to companies repaying debt. If oil prices fall, a seemingly highly solvent country could quickly look nearly insolvent. Some other rising stars, such as Brazil and even India, may have similar problems.
US exchanges are closed today (oops, no, they're not), but the European exchanges have so far stabilized a bit. The UK is buying into some of their largest banks to support them, and the Bank of England and the European Central Bank are going to offer banks unlimited funding in dollars.

This is genuine global crisis, with the shortage of dollars playing the part that the shortage of gold did in the run-up to the Great Depression.

Fed Statement:
In order to provide broad access to liquidity and funding to financial institutions, the Bank of England (BoE), the European Central Bank (ECB), the Federal Reserve, the Bank of Japan, and the Swiss National Bank (SNB) are jointly announcing further measures to improve liquidity in short-term U.S. dollar funding markets.

The BoE, ECB, and SNB will conduct tenders of U.S. dollar funding at 7-day, 28-day, and 84-day maturities at fixed interest rates for full allotment. Funds will be provided at a fixed interest rate, set in advance of each operation. Counterparties in these operations will be able to borrow any amount they wish against the appropriate collateral in each jurisdiction. Accordingly, sizes of the reciprocal currency arrangements (swap lines) between the Federal Reserve and the BoE, the ECB, and the SNB will be increased to accommodate whatever quantity of U.S. dollar funding is demanded. The Bank of Japan will be considering the introduction of similar measures.

Central banks will continue to work together and are prepared to take whatever measures are necessary to provide sufficient liquidity in short-term funding markets.

Federal Reserve Actions
To assist in the expansion of these operations, the Federal Open Market Committee has authorized increases in the sizes of its temporary swap facilities with the BoE, the ECB, and the SNB, so that these central banks can provide U.S. dollar funding in quantities sufficient to meet demand.

These arrangements have been authorized through April 30, 2009.
The World Bank met Sunday to discuss the plight of the poorer countries.

Throwing any sort of trade impediments, such as biofuel subsidies or carbon cap trade schemes into this witches brew is the recipe for an explosion.

I guess Europe has a few ways of looking at this.

For the eurozone, it wouldn't be right to step in before the currency union sorts out its own funding and props up the mostly smaller states that are at risk of being swamped by their banks' exposure.

For the EU, Iceland would have to give a few trade and North Sea territoriality concessions - especially if Britain has its say.

Thirdly, if Iceland is of strategic importance then it will be supported after a suitable period of twisting in the wind - but with a long term view of absorption in to the union.

Actually, I'm just guessing!
You consistently display your ignorance about international affairs. But this time I had to respond again:

Europe has not developed a regional solution, exacerbating the quiet worries that had always existed about the durability and viability of the union when stressed.

You might want to do a Google search and then you'll find out that Island is NOT a member of the union.
Shtove and RE -

Iceland has its own currency, and is not a part of the EU. It is a member of the European free trade association.

But official status hardly matters, under the circumstances. What matters (aside from the problem of making sure the population's basic needs are met) is the effect that this can have on Europe. It's a NATO member. Forcing it to turn to Russia for money raises various issues.

When Mexican junk bonds went south, the US ended up backstopping our banks who had them in several ways. What matters is exposure!

The economic exposure Europe has is both direct, and that is not insubstantial, and indirect. Much of the economic growth in the EU recently has come from the ring of fire which is mostly composed of smaller, developing states. Several f them still have their own currencies. It will be very problematic for all of Europe if the Icelandic crisis makes lenders withdraw their funds from several of those states.

Hungary has also gone to the IMF.

See this article for more.
There's a lot of talk of reliance on Russia, but here's the real deal for Iceland, from the Times:

"Despite reports to the contrary, Iceland has not officially requested the International Monetary Fund for financing, an IMF spokesman said last night.

"Iceland has become one of the biggest victims of the credit crunch as the crisis in global credit markets wipes out a decade of unprecedented growth by the country’s previously unheralded financial sector.

"Ingibjorg Solrun Gisladottir, the foreign minister, said that joining the European Union must now be a long-term ambition.

"Such a move had been fiercely opposed by the country’s fishing industry because of the likely concessions its fleets would have to make.

"Ms Solrun Gisladottir said: “In the short term, our defence is co-operation with the International Monetary Fund and in the long term EU membership, adoption of the euro and backup from the European Central Bank.” Einar Gudfinnsson, the fisheries minister, admitted that there may be little alternative."


Surprised at my foresight!
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