What he finds, and your humble blogger has been saying since the beginning of the financial crisis, is that the Swedish Model that requires the banks to recognize upfront the losses on the excess debt in the financial system is vastly superior to the Japanese Model that protects bank book capital levels and banker bonuses at all costs.
WAY back in the autumn of 2008, the joke in financial circles was that the only difference between Ireland and Iceland was a letter and six months. Now, with the Icelandic banks preparing to issue foreign currency bonds once again, it turns out that the joke was on us.
Remember when the Icelandics did the unthinkable and, unlike Ireland, told bank creditors to take a hike? They also imposed capital controls and allowed the value of their currency to fall – the Icelandic krona has lost almost half of its value against the euro over the past five years.
The "experts" queued up to assure us that these latter-day Vikings would be severely punished for their impertinence....
Meanwhile, we in Ireland did what we were told and repaid over €70bn of bank bonds at par. By doing so, even at the cost of bankrupting the State, the "experts" assured us that we would retain the confidence of the markets.
Now, four years later, it is clear that, not for the first time, the "experts" have got it wrong. Catastrophically and utterly wrong.Nice to have one's ideas confirmed.
Since putting the taxpayer on the hook for the banks' debts, the domestic economy has shrunk by almost a quarter in nominal or cash terms. And any real recovery is still a long way off....The reason that recovery is a long way off is that by having put the burden of the excess debt on the real economy, Ireland has diverted the capital needed for reinvestment and growth to debt service.
Way out in the North Atlantic, things have turned out rather differently. Economic growth is expected to be 3.1 per cent this year and 2.2 per cent in 2013.
But surely after stitching up its bank creditors – the Icelandic banking default cost $85bn, a massive amount for a country with a population of 320,000 people – the country remains persona non grata with the international financial markets. Having been so badly bitten once, the markets must be twice or even thrice shy of Iceland.
The Icelandic treasury successfully flogged $1bn of 10-year bonds to investors in May.
These bonds were initially priced to yield a spread of 407 basis points (4.07 per cent) over comparable US treasuries, a margin which has since narrowed to 296 basis points.
In the financial markets, as elsewhere in life, eaten bread is soon forgotten. Would-be investors in Icelandic bonds focus most of their attention, not on what happened in the past, but on what is likely to happen in the future.
What these investors see is that, by burning the bank bondholders rather than taking these debts on to the national balance sheet, the Icelandic sovereign is in a far stronger position to repay any future debts.This is why I keep saying that Spain should require its banks to recognize the losses rather than placing the burden on the government to borrow the money to socialize the losses.
Compare this to the Irish situation. By being good boys did we retain the confidence of the markets?
No we didn't.
We too were locked out of the markets and were bounced into accepting an EU/IMF bailout in November 2010.
Far from doing better than the Icelandics, we have ended up with the worst of all possible worlds. We are still stuck with the banks' legacy debts and, a few carefully choreographed fund raisings by the NTMA notwithstanding, the State remains largely reliant on official lenders to fund its activities.
This is because investors can see that, with the debts of the Irish State likely to exceed €200bn – the equivalent of more than 150 per cent of GNP – by the end of 2013, there is no way the Irish sovereign can repay existing borrowings let alone any new loans it may seek to raise.Sacrificing the government's capacity to raise funds to cover the bankers' losses ends up dragging down the country and its real economy for no benefit.
Now, as if to add insult to injury, the Icelandic banks are preparing a return to the markets.
Unlike Ireland, Iceland immediately nationalised its bust banks in the autumn of 2008 but refused to assume responsibility for their liabilities. The cleaned-up Icelandic banks are now getting ready to issue foreign currency bonds, the proceeds of which will be used to help finance the thriving, export-driven Icelandic economy.As predicted, having swallowed the losses, Iceland's banks have moved on and are now prepared to tap the capital markets.
When we look at what has happened in Iceland, the proposed deal on legacy Irish bank debt tastes like very thin gruel indeed. Once again the Irish Government is talking up the chances of such a deal following last week's apparent agreement by EU finance ministers on a new eurozone banking supervision regime.
The latest "deadline" for such a deal is supposedly the end of March 2013. Given that several previous "deadlines" have come and gone, don't hold your breath.
Maybe, instead of being the good boys it's time we followed the Icelandic example and indulged in some Viking-style plunder and pillage.