Chapter 13 of 13 · Deep Freeze: Iceland's Economic Collapse by Philipp Bagus
Index A
aid to Iceland
early requests for liquidity swaps ignored, 97
from foreign countries, 2–3, 77, 92–94
from International Monetary Fund, 92, 93, 94
Alcoa, 55
Althing
funds construction of power plants for aluminum smelting, 55
overspends budget, 4,
votes for accession talks with European Union, 120
aluminum smelting, 54–55, 94, 106, 117
American Insurance Group, 79
Anti-terrorism, Crime, and Security Act of 2001, 86
Armani, 70
Arnason, Ragnar, 64
Asgeir, Jon, 66
asset prices
became inflated during boom, 45, 47, 67, 75
collapsed during crisis, 22–23, 79, 83
Austrian theory of business cycles, 51–54
B
balance of trade, see trade deficit
Bang and Olufsen, 69
Bank of Canada
inflation-tracking model of, adopted (with adjustments) by Central Bank of Iceland, 16–17
reduced interest rates during the boom years, 13
Bank of England
rescues Halifax Bank of Scotland, 79
reduces interest rates during the boom years, 13–14
will not establish currency swap with Central Bank of Iceland, 97
Bank of Japan, low interest rates of, 38, 39 fig, 43, 46–47
Banking (Special Provisions) Act, 85
banks, Icelandic, other than Central Bank of Iceland
and mortgage market, 13, 45, 58–61
big three banks (Glitnir, Kaupthing, Landsbanki) “too big to fail,” 11
Bunadarbanki, 37
British newspaper coverage of problems of, 77, 84–85
maturity-mismatched portfolios of big three, 23 fig
nationalizing of big three, 2
net domestic assets and net foreign assets of, 44
precarious condition of during 2008 liquidity squeeze, 80–84
privatized in 2003, 4
recruitment of labor for, 2, 65
reforms of banking under Prime Minister Davíð Oddsson, 3, 115, 124
retail banking business of, in Great Britain, the Netherlands, and Germany, 37–38
shrinking of, following the crisis, 111, 112
Sparisjóðabanki, 87
total assets of big three banks, 96
total debt of, after the crisis, 89
see also Glitnir, Kaupthing, Landsbanki
Baugur, 66
Bear Stearns, 76
big three Icelandic banks (Glitnir, Kaupthing, and Landsbanki), see banks, Icelandic, other than Central Bank of Iceland; Glitnir; Kaupthing; Landsbanki
BNP Paribas, 76
Boorman, Jack, on the importance of legal and regulatory architecture to the economy, 31
borrowing in foreign currencies
by Icelandic banks, 5, 6, 37–38
incentivized by stabilized exchange rates, 33, 34, 35
see also currency mismatching
borrowing short and lending long defined, 8 n 5
see also maturity mismatching
Bradford and Bingley, 79
Brown, Gordon (UK Prime Minister) threatens to sue Iceland and freeze more Icelandic assets, 86
Buffett, Warren, 74
business cycles, Austrian theory of, 51–54
C
capital, restrictions on moving in and out of Iceland, 91–92
career aspirations and preparation in Iceland turn to banking and finance, 2, 64–65
Caruana, Jaime, 62–63
Central Bank of Iceland (CBI)
and maturity mismatching, 117
auctions off its foreign exchange reserves, 103
interest rates increased by, 75, 77
interest rates reduced by, 13–14
liquidity swaps of, 97–98
moral hazard caused by CBI’s role as lender of last resort, 10–13, 95–96, 100, 103, 118
negotiates for Russian loan, 92–93, 98
not independent of government, 3, 116
reserve requirements reduced by, 12–13
restricts purchase of foreign currency, 91
shortage of foreign reserves, 96–97
tries to arrest housing boom, 62
undercapitalized in foreign assets, 100
see also aid to Iceland
Chopra, Ajai, 62–63
Citigroup, 79
credit default swap (CDS), 73–75
credit expansion by central banks
an instance of maturity mismatching, 8, 24, 117
and asset prices, 67
and stock prices, 71
artificially lengthens structure of production, 106
causes business cycles, 116–117
encouraged by the existence of a central bank that is prepared to help troubled banks, 116
“exported” via currency mismatching, 42, 43
fueled international asset-price boom, 67
impossible under a gold standard, 124–125
leads to rollover stoppage, 117
made Icelandic banks vulnerable, 9, 75
magnified by lowering of reserve requirement, 13, 14
violates depositors’ property rights, 116
see also Austrian theory of business cycles
currency mismatching, 5–6, 37–50
a way to “export” maturity mismatching, 42, 43
banks thought currency swaps would protect against risks from, 116–117
consequences when króna declined in value, 77, 81 87, 90
defined, 38
encouraged by high foreign exchange rate, 50, 62
encouraged by stabilized exchange rates and by government or IMF guarantees, 38–39
IMF recommendations regarding, 42
made interest rates lower, 56
profitability of, 38
would have been prevented under gold standard
D
Darling, Alistair, UK Chancellor of the Exchequer, 86
De Grauwe, Paul, on maturity mismatching in banking, 10
decadence resulting from inflationary economy, 70
Debenhams, 66
debt-to-equity ratios of Icelandic companies, 71
Diamond, Douglas W. and Philip H. Dybvig on maturity mismatching in banking, 10
E
EasyJet, 66
egalitarianism of Icelandic society, 56
employment and unemployment, 2, 69, 109, 110, 122, see also
unemployment insurance; workers, temporary migrant
entrepreneurs need to learn skills to maintain production structure, 106
European Central Bank, 12, 43, 92, 97
European Economic Area, Iceland a member of, 121
European Union, whether Iceland should join or not, 119–124
exchange rate, see foreign exchange rate
exports
aluminum, 54
lack of capacity to increase, following fall of exchange rate, 112
seafood, 122
used cars, 106–107
F
Fannie Mae (Federal National Mortgage Association), 56
Federal Deposit Insurance Company, 79
Federal Reserve, 13, 14, 43, 78, 92
Financial Services Authority (UK), mentioned, 87
Financial Supervisory Authority (Iceland), mentioned, 84, 85
fishing industry, vi–vii, 107–108, 122
FL Group, 66
Flanagan, Mark, 119
foreign exchange rate, 76 fig
change to floating rate, 14
drop in, against Japanese Yen and Swiss Franc, 89
effect of lower rates on exports, 112
effect of lower rates on imports, 99
high and stable rate encouraged currency mismatching, 38–39, 50
lower since the crisis, 111, 112
risk from changes in, 33, 117–118
stabilized, January through Spring 2009, 99–100
stabilizing, discussed by Iceland and IMF, 92
foreign exchange restrictions, following crisis, 3, 91–92
exporters use informal offshore markets to avoid, 91
Fortis, 80
Freddie Mac (Federal Home Loan Mortgage Corporation), 56
G
G20, 31–32
Geyser Crisis, 73–76
glacier bonds, 63
Glitnir
failure of, 12
government’s plan to support, 83
put into receivership, 84
see also banks, Icelandic, other than Central Bank of Iceland gold, price of, 76
gold standard would have prevented
Iceland’s financial crisis, 124–125
golden rule, 8–9, 10, 74, see also maturity mismatching
Goldman Sachs, 79
government ultimately responsible for Icelandic crisis, 3–5, 115–117
Gudmundsson, Bjogolfur, 67
H
Haarde, Geir
on his doubts that Iceland should join the European Union, 120
televised address during financial crisis, 85
Hamleys, 66
Haraldsson, Gunnar, 47
HEKLA, 107
Heritable Bank, 85
Honjo, Keiko, and Benjamin Hunt, 18
Honjo, Keiko, and Srobona Mitra, 18
Housing Financing Fund (HFF), 21, 56–62
housing in Iceland
see also Housing Finance Fund; mortgage market
Hübner, Otto, 8
Hülsmann Jörg Guido, 71
Human Development Index, 1, 40
Hunt, Benjamin, 56
Hypo Real Estate, 80
I
Icelandair, 66
Icelandic language, marks of the crisis on, 119
imports
increase as resources are shifted to financial industry, 65
increase because of strong króna, 62, 65
nature of, 94
see also trade deficit
inflation
incentivizes debt, 71
rate of, 2, 14–20, 44–45, 73, 84, 99
spurs overconsumption, 69–70
inflation targeting scheme of Central Bank of Iceland, 14–19, 44–45
interest rates
artificially low worldwide during 2000s, 43, 117
reduced by several nations’ central banks during boom, 13
International Monetary Fund (IMF), 27
expansion of powers of, 27–28, 29–32
loss of relevance of, following global shift to flexible exchange rates, 29–30
moral hazard caused by IMF’s role as lender of last resort, 5–6, 28, 32–35, 38–41, 88, 118
origin and original goals of, 29
stand-by arrangement between Iceland and International Monetary Fund, 98–99
talks with Icelandic government about aid to stabilize the króna, 92
K
Kaupthing
compensation of directors of, 71
default of foreign subsidiaries of, 87
placed in receivership, 87
profits of, mostly from marking up assets, 71
see also banks, Icelandic, other than Central Bank of Iceland; Kaupthing Bank Sverige; Kaupthing Edge; Kaupthing Singer and Friedlander
Kaupthing Bank Sverige, 87
Kaupthing Edge, 12, 76, 80, 81, 87, 93
Kaupthing Singer and Friedlander, 40
króna
shunned by Icelanders after the crisis, 2
see also foreign exchange rate
Krueger, Anne, on IMF’s role in preventing and resolving economic crises, 31
L
labor, see banks: recruitment of labor for; career aspirations and preparation in Iceland turn to banking and finance; employment and unemployment; retraining and reassignment of workers; unemployment insurance; workers, temporary migrant
Landsbanki
assets in Britain frozen, 86
placed in receivership, 85
see also banks, Icelandic, other than Central Bank of Iceland
Left-Green party against Iceland’s joining the European Union, 121–122
Lehman Brothers, 1, 11, 78, 117
Lipton, David, on governments, the IMF, and globalization, 31
liquidity swaps, 92 bis, 93, 94, 97–98, 124,
M
Magasin du Nord, 66
Magnusson Gylfi, in favor of Iceland’s joining the
European Union, 121
malinvestments
in aluminum smelting, 54–55, 94, 106, 117
must be liquidated, 105
result from credit expansion and maturity mismatching, 6, 9, 25, 47, 52
Mathiesen, Árni, Icelandic Finance Minister, 86
maturity mismatching, 5, 7–8, 101–102, 117–118
defined, 7
distorts structure of production, 24–25
endorsed by many modern economists, 10
profitability of, 7–8
transforms artificial low short term interest rates into artificial low long-term rates, 25
McVeigh, Tracey, on Iceland’s financial collapse, 84
Mises, Ludwig von on golden rule, 8
on malinvestments, 52
money market mutual funds, 79
money supply, Icelandic, 12–13, 15, 19–20, 48, 117
moral hazard, see under Central Bank of Iceland; International Monetary Fund
Morgan Stanley, 79
mortgage market, 13, 45, 55–63
mortgages denominated in Yen and Swiss Francs become burdensome as króna exchange rate collapses, 89
N–O–P
Northern Rock, 23–24
nouveau riche Icelanders, 70
Oasis, 67
Oddsson, Davíð
against Iceland’s joining the European Union, 123
banking sector deregulated and privatized during his time as Prime Minister, 3, 115, 124
chairman of board of governors of Central Bank of Iceland, 12, 86, 95
ousted from CBI chairmanship, 116
overconsumption, 68–71
encouraged by high currency exchange rate, 62
encouraged by low interest rates, 52–53, 68
Icelanders must regain their traditional prudence about spending and credit, 105
would not have occurred under gold standard, 125
Preston, Robert, on Iceland’s precarious financial position, 84
R
recession necessary for Iceland’s recovery, 124
recovery of Icelandic economy, 105–125
Rehn, Olli, European Commissioner for Economic and Financial
Affairs, on the possibility of
Iceland joining the European Union, 122
reserve requirements for banks, 12–13, 14
retraining and reassignment of workers, 108–109, 111
rollover, rolling over of deposits defined, 7, 8
Royal Bank of Scotland, 79
Royal Unibrew, 66
S
Schengen Area, 120
Shearer, Tony, 71
Sigurðardóttir, Jóhanna, 116, 121
Singer and Friedlander, 71
Sparisjóðabanki, 87
“spread” between long-term and short-term interest rates defined, 8
standard of living, in Iceland, 1, 28, 40
State Housing Board, 21
stock market, 2
boom in, 71–72
trading suspended for three days, 88
declines in, after crisis, 88
structure of production, 64, 106
T
Tatarintsev, Victor I., 92
taxes and contributions to social security in Iceland, 3, 115
Tchaidze, Robert, Anthony Annett, and Li Lian Ong, 56
Thomsen, Poul, on cause of Icelandic financial debacle, 4
Thorvaldsson, Armann
on his expectation of foreign help for Iceland in case of financial crisis, 40
on lavish consumption during the boom, 69–70
time structure of production, see structure of production
trade deficit, 55, 65, 66 fig, 96–97, 112
U
unemployment and
underemployment, 2, 69, 109, 110, see also unemployment insurance
unemployment insurance, 109–111
W
Washington Mutual, 79
Wachovia, 79
welfare state, Iceland a, 115, see also taxes and contributions to social security; standard of living
Wells Fargo, 79
West Ham United, 67
Westin, Ann-Margret, 56
Woolworths, 66
Deep Freeze: Iceland's Economic Collapse
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