Lessons from Iceland – Model of Recovery

Go Lean Commentary

There are so many lessons the Caribbean region can learn from the island Republic of Iceland.

CU Blog - Lessons from Iceland - Model of Recovery - Photo 1First, it’s an island, Duh!!!

Just like with the Caribbean, logistics of trade is more difficult as it must be based on naval and aeronautical solutions.

They have natural disasters … volcanoes as opposed to hurricanes or earthquakes.

The population is 320,000 … the range of many Caribbean countries; (i.e. Bahamas, Barbados, Belize, Guadeloupe (Fr.), Martinique (Fr.) and Suriname). Yet, it is not grouped with the formal Small Island Developing States (SIDS) as is all the sovereign Caribbean territories. The following defines the common traits:

Small Island Developing States are low-lying coastal [sovereign] countries that tend to share similar sustainable development challenges, including small but growing populations, limited resources, remoteness, susceptibility to natural disasters, vulnerability to external shocks, excessive dependence on international trade, and fragile environments. Their growth and development is also held back by high communication, energy and transportation costs, irregular international transport volumes, disproportionately expensive public administration and infrastructure due to their small size, and little to no opportunity to create economies-of-scale. – Source: https://en.wikipedia.org/wiki/Small_Island_Developing_States

Iceland has done many things well so that everyone in the Caribbean, all SIDS countries for that matter, need to take notice.

During the bad days of the Great Recession – at the precipice of disaster – the country deviated from other troubled regions …

Iceland let its banks fail in 2008 because they proved too big to save.

How does it relate to the Caribbean? The Caribbean is at the precipice … now; many of the member-states are near Failed-State status, while others are still hoping to recover from the devastating Great Recession of 2008. Turn-around should not take this long – 7 years. Strategies, tactics and implementations of best-practices to effect a turn-around must be pursued now.

Iceland has now recovered, and complaining about a 2% unemployment rate. What did they do that was so radically different than other locations? For one, they changed course regarding economics, security and governing policies. An ultra-capitalist movement had taken hold of the country and business communities; they pursued an aggressive “boom-or-bust” strategy, that ultimately “busted”, rather than continue on that road, the country – all aspects of society – altered course and returned to a path of sound fundamentals.

They rebooted and turned-around! Iceland embraced all aspects of turn-around strategies, mandating bankruptcies and “wind-downs” so that the economy – and society in general – could start anew.

This article is in consideration of the book Go Lean…Caribbean; it serves as a roadmap for the introduction and implementation of the technocratic Caribbean Union Trade Federation (CU) and Caribbean Central Bank (CCB) to provide better stewardship, to ensure that the economic/currency failures of the past, in the Caribbean and other regions, do not re-occur here in the homeland.

We can learn so much from this episode in Icelandic history, the good, the bad and the ugly. See the encyclopedic details here:

Reference Title: Iceland’s Economy and Recovery
CU Blog - Lessons from Iceland - Model of Recovery - Photo 2In 2007, Iceland was the seventh most productive country in the world per capita (US$54,858), and the fifth most productive by GDP at purchasing power parity ($40,112). About 85 percent of total primary energy supply in Iceland is derived from domestically produced renewable energy sources.[93] Utilization of abundant hydroelectric and geothermal power has made Iceland the world’s largest electricity producer per capita.[94] … Historically, Iceland’s economy depended heavily on fishing, which still provides 40% of export earnings and employs 7% of the work force.[49] The economy is vulnerable to declining fish stocks and drops in world prices for its main material exports: fish and fish products, aluminum, and ferrosilicon.

Iceland had been hit especially hard by the Great Recession that began in December 2007, because of the failure of its banking system and a subsequent economic crisis. Before the crash of the country’s three largest banks, Glitnir, Landsbanki and Kaupthing, their combined debt exceeded approximately six times the nation’s gross domestic product of €14 billion ($19 billion).[116][117] In October 2008, the Icelandic parliament passed emergency legislation to minimize the impact of the Financial crisis. The Financial Supervisory Authority of Iceland used permission granted by the emergency legislation to take over the domestic operations of the three largest banks.[118] Icelandic officials, including central bank governor Davíð Oddsson, stated that the state did not intend to take over any of the banks’ foreign debts or assets. Instead, new banks were established to take on the domestic operations of the banks, and the old banks will be run into bankruptcy.

On 28 October 2008, the Icelandic government raised interest rates to 18% (as of August 2010, it was 7%), a move which was forced in part by the terms of acquiring a loan from International Monetary Fund (IMF). After the rate hike, trading on the Icelandic króna finally resumed on the open market, with valuation at around 250 ISK per Euro, less than one-third the value of the 1:70 exchange rate during most of 2008, and a significant drop from the 1:150 exchange ratio of the week before.

CU Blog - Lessons from Iceland - Model of Recovery - Photo 3On 20 November 2008, in an effort to stabilize the situation, the Icelandic government stated that all domestic deposits in Icelandic banks would be guaranteed, imposed strict capital controls to stabilize the value of the Icelandic króna, and secured a US$5.1bn sovereign debt package from the IMF and the Nordic countries – Denmark, Finland, Norway, and Sweden agreed to lend $2.5 billion. [119] – in order to finance a budget deficit and the restoration of the banking system. (The international bailout support program led by IMF officially ended on August 31, 2011, while the capital controls which were imposed in November 2008 are still in place only recently ended in the last few weeks).

On 26 January 2009, the coalition government collapsed due to the public dissent over the handling of the financial crisis. A new left-wing government was formed a week later and immediately set about removing Central Bank governor Davíð Oddsson and his aides from the bank through changes in law. Davíð was removed on 26 February 2009 in the wake of protests outside the Central Bank.[120]

The financial crisis had a serious negative impact on the Icelandic economy. The national currency fell sharply in value, foreign currency transactions were virtually suspended for weeks, and the market capitalization of the Icelandic stock exchange fell by more than 90%. As a result of the crisis, Iceland underwent a severe economic depression; the country’s gross domestic product dropped by 10% in real terms between the third quarter of 2007 and the third quarter of 2010.[6] A new era with positive GDP growth started in 2011, and has helped foster a gradually declining trend for the unemployment rate. The government budget deficit has declined from 9.7% of GDP in 2009 and 2010 to 0.2% of GDP in 2014;[7] the central government gross debt-to-GDP ratio is expected to decline to less than 60% in 2018 from a maximum of 85% in 2011.[8]

[A post-mortem analysis helped to put the blame for Iceland’s crisis on a bad community ethos that had encapsulated the whole country related to debt]:

[Disregarding their] small domestic market, Iceland’s banks had financed their expansion with loans on the interbank lending market and, more recently, by deposits from outside Iceland (which are also a form of external debt). Households also took on a large amount of debt, equivalent to 213% of disposable income, which led to inflation.[117] This inflation was exacerbated by the practice of the Central Bank of Iceland issuing liquidity loans to banks on the basis of newly issued, uncovered bonds[118] – effectively, printing money on demand.

[Then the turn-around took hold …]

By mid-2012 Iceland was regarded as one of Europe’s recovery success stories. It has had two years of economic growth. Unemployment was down to 6.3% and Iceland was attracting immigrants to fill jobs. Currency devaluation effectively reduced wages by 50% making exports more competitive and imports more expensive. Ten-year government bonds were issued below 6%, lower than some of the PIIGS nations in the EU (Portugal, Italy, Ireland, Greece, and Spain). Tryggvi Thor Herbertsson, a member of parliament, noted that adjustments via currency devaluations are less painful than government labor policies and negotiations.

By June 2012, Landsbanki managed to repay about half of the Icesave debt.[124]

According to Bloomberg, Iceland was on the trajectory of 2% unemployment as a result of crisis-management decisions made back in 2008, including allowing the banks to fail.[125]. [Here are the highlighted bullets of this story posted January 27, 2014:]

    Iceland let its banks fail in 2008 because they proved too big to save.
    Now, the island is finding crisis-management decisions made half a decade ago have put it on a trajectory that’s turned 2 percent unemployment into a realistic goal.
    While the Euro area grapples with record joblessness, led by more than 25 percent in Greece and Spain …

[Iceland is NOT a member of the EU], nevertheless, while EU fervor has cooled [due to the crisis] the government continues to pursue membership.[246]
Source: Wikipedia Online Encyclopedia – Retrieved 09/23/2015 from: https://en.wikipedia.org/wiki/2008%E2%80%9311_Icelandic_financial_crisis


VIDEO – What Can Greece (and the Caribbean) Learn From Iceland? – http://www.bloomberg.com/news/videos/2015-08-28/what-can-greece-learn-from-iceland-

Published on Aug 28, 2015 – Central Bank of Iceland Governor Mar Gudmundsson talks with Brendan Greeley about Iceland’s capital controls and what Greece can learn from Iceland in handling its credit crisis. He speaks on “Bloomberg Markets.”

The lessons from Iceland really magnify in reflection of the Caribbean considering the community ethos or attitudes regarding “debt”. The book described community ethos as:

“the fundamental character or spirit of a culture; the underlying sentiment that informs the beliefs, customs, or practices of a group or society; dominant assumptions of a people or period; practices of a group or society; dominant assumptions of a people or period” – Go Lean…Caribbean Page 20.

While Iceland featured a negative community ethos in this case, their model demonstrates that the spirit-beliefs-customs-practices of a community can be altered.

Yes, Iceland fixed their heart … first; then the recovery of the community’s economic, security and governing engines took root. It is very important that the Caribbean learn this lesson and apply the corrections to our community ethos, and then to our systems of commerce and governance. The Go Lean book opened with this pronouncement (Page 10), gleaning insight from the US Declaration of Independence:

We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable rights, that among these are life, liberty and the pursuit of happiness; that to secure these rights, governments are instituted among men, deriving their just powers from the consent of the governed. That whenever any form of government becomes destructive to these ends, it is the right of the people to alter or to abolish it, and to institute new government, laying its foundation on such principles and organizing its powers in such form, as to them shall seem most likely to effect their safety and happiness.

The Go Lean roadmap calls for instituting the CU Trade Federation and the Caribbean Central Bank (CCB) to take the lead in forging the needed changes to the region’s economic and financial eco-systems. Firstly, there is the need to foster the best practices in the region regarding debt. The roadmap calls for a cooperative among Central Banks to form the CCB to foster interdependence, sharing, economies-of-scale and collaboration across the region despite the divergent politics, culture and languages. The premise is simple: while we are all different, we are all “in the same boat”. So the underlying principle of this motivation is the regional Greater Good.

The realities of the Great Recession, and Iceland’s troubles in the foregoing reference source, prove the interconnectivity of the financial systems; bank/currency troubles in one country easily become trouble for another country. A larger Single Market (42 million people in 30 member-states) for the Caribbean would provide less elasticity and more shock-absorption here from eruptions in the global financial markets. The Caribbean is never spared; in fact we are directly affected as tourism – our primary economic driver – depends on the disposable income from our trading partners, mostly North American and Western European countries. This is why our region was so devastated with the events, repercussions and consequences of 2008.

Considering the past, the Caribbean has had to learn hard lessons on economic booms … and busts. Any attempt to reboot Caribbean economic landscape must first start with a strenuous oversight of regional currencies. Thusly, the strategy is to integrate to the single currency, the Caribbean Dollar (C$). The tactical approach is to provide technocratic oversight with the CCB pursuing only the Greater Good, and no special group’s special interest.

Also in the opening of the Go Lean book, this need for regional stewardship of Caribbean currencies was pronounced in the Declaration of Interdependence (Page 12 & 13) with these statements:

xi.    Whereas all men are entitled to the benefits of good governance in a free society, “new guards” must be enacted to dissuade the emergence of incompetence, corruption, nepotism and cronyism at the peril of the people’s best interest. The Federation must guarantee the executions of a social contract between government and the governed.

xii.   Whereas the legacy in recent times in individual states may be that of ineffectual governance with no redress to higher authority, the accedence of this Federation will ensure accountability and escalation of the human and civil rights of the people for good governance, justice assurances, due process and the rule of law. As such, any threats of a “failed state” status for any member state must enact emergency measures on behalf of the Federation to protect the human, civil and property rights of the citizens, residents, allies, trading partners, and visitors of the affected member state and the Federation as a whole.

xxiv.    Whereas a free market economy can be induced and spurred for continuous progress, the Federation must install the controls to better manage aspects of the economy: jobs, inflation, savings rate, investments and other economic principles. Thereby attracting direct foreign investment because of the stability and vibrancy of our economy.

xxv.    Whereas the legacy of international democracies had been imperiled due to a global financial crisis, the structure of the Federation must allow for financial stability and assurance of the Federation’s institutions. To mandate the economic vibrancy of the region, monetary and fiscal controls and policies must be incorporated as proactive and reactive measures. These measures must address threats against the financial integrity of the Federation and of the member-states.

The Go Lean book, and previous blog/commentaries, stressed the key community ethos, strategies, tactics, implementations and advocacies necessary to appoint new stewards for the regional financial eco-system. These points are detailed in the book as follows:

Community Assessment – Puerto – The Greece of the Caribbean Page 18
Community Ethos – Economic Principles – All Choices Involve Costs Page 21
Community Ethos – Economic Principles – Economic Systems Influence Individual Choices Page 21
Community Ethos – Economic Principles – Consequences of Choices Lie in the Future Page 21
Community Ethos – Economic Principles – Money Multiplier Page 23
Community Ethos – Governing Principles – Lean Operations Page 24
Community Ethos – Governing Principles – Return on Investments Page 24
Community Ethos – Governing Principles – Cooperatives Page 25
Community Ethos – Ways to Impact the Future – Count on the Greedy to be Greedy Page 26
Community Ethos – Ways to Impact Turn-Arounds – Bankruptcy Processing Page 33
Community Ethos – Ways to Improve Sharing Page 35
Community Ethos – Ways to Impact the Greater Good Page 37
Strategy – Vision – Confederate the region into a Single Market Page 45
Strategy – Mission – Fortify the Stability of the Securities Markets Page 45
Strategy – Provide Proper Oversight and Support for the Depository Institutions Page 46
Strategy – e-Payments and Card-based Transactions Page 49
Tactical – Confederating a Permanent Union Page 63
Tactical – Growing the Economy – Minimizing Bubbles Page 69
Tactical – Separation-of-Powers – Depository Insurance & Regulatory Agency Page 73
Anecdote – Turning Around CARICOM – Effects of 2008 Financial Crisis Page 92
Implementation – Assemble Caribbean Central Bank as a Cooperative Page 96
Implementation – Ways to Better Manage Debt Page 114
Planning – 10 Big Ideas – Single Market / Currency Union Page 127
Planning – Lessons Learned from 2008 Page 136
Planning – Lessons Learned from New York City – Wall Street Page 137
Planning – Ways to Measure Progress Page 147
Anecdote – Caribbean Currencies Page 149
Advocacy – Ways to Grow the Economy Page 151
Advocacy – Ways to Control Inflation Page 153
Advocacy – Ways to Better Manage Foreign Exchange Page 154
Advocacy – Ways to Improve Governance Page 168
Advocacy – Ways to Better Manage the Social Contract Page 170
Advocacy – Ways to Foster Cooperatives Page 176
Advocacy – Ways to Foster Electronic Commerce Page 198
Advocacy – Reforms for Banking Regulations Page 199
Advocacy – Ways to Impact Wall Street Page 200
Advocacy – Ways to Impact Main Street Page 201
Appendix – Tool-kits for Capital Controls Page 315

There is a lot to learn from the analysis of economic stewardship of other communities. The successes and failures of banking/economic stewardship were further elaborated upon in these previous blog-commentaries:

http://www.goleancaribbean.com/blog/?p=6531 A Lesson in History – Book Review of the ‘Exigency of 2008’
http://www.goleancaribbean.com/blog/?p=5818 Greece: From Bad to Worse
http://www.goleancaribbean.com/blog/?p=4166 A Lesson in History – Panamanian Balboa
http://www.goleancaribbean.com/blog/?p=3858 ECB unveils 1 trillion Euro stimulus program
http://www.goleancaribbean.com/blog/?p=3814 Lessons from the Swiss unpegging the franc
http://www.goleancaribbean.com/blog/?p=3582 For Canadian Banks: Caribbean is a ‘Bad Bet’
http://www.goleancaribbean.com/blog/?p=3397 A Christmas Present for the Banks from the Omnibus Bill
http://www.goleancaribbean.com/blog/?p=3090 Lessons Learned – Europe Sovereign Debt Crisis of 2009
http://www.goleancaribbean.com/blog/?p=3028 Why India is doing better than most emerging markets
http://www.goleancaribbean.com/blog/?p=2930 ‘Too Big To Fail’ – Caribbean Version
http://www.goleancaribbean.com/blog/?p=2090 The Depth & Breadth of Remediating 2008
http://www.goleancaribbean.com/blog/?p=1014 Canadian View: All is not well in the sunny Caribbean
http://www.goleancaribbean.com/blog/?p=833 One currency, divergent economies
http://www.goleancaribbean.com/blog/?p=518 Analyzing the Data – What Banks learn about financial risks

According to the foregoing article, and VIDEO, the origin of Iceland’s crisis was greed; the banks assuming more risk, to garner more profit, and consumers borrowing more credit so as to … consume more.

Greed – it is what it is.

The Go Lean book declares to “count on greedy people to be greedy” (Page 26). This situation is manifested time and again, all over the world. The Go Lean book provides the roadmap to anticipate greed, monitor and mitigate it. The book declares (Page 23):

… “bad actors” will also emerge thereafter to exploit the opportunities, with good, bad and evil intent. A Bible verse declares: “What has been will be again, what has been done will be done again; there is nothing new under the sun” – Ecclesiastes 1:9 New International Version.

We have so many lessons to learn from the Great Recession, and the disposition of Iceland.

Only at the precipice do they change!

Lesson learned!

The Caribbean is hereby urged to lean-in to this Go Lean confederation roadmap. Everyone – people, businesses, banks and governments – can benefit from the consideration of this roadmap. As this roadmap is the “turn-by-turn directions”, the heavy-lifting, to move the region to its new destination: a better homeland to live, work and play.  🙂

Download the book Go Lean … Caribbean – now!

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